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Daily Rules, Proposed Rules, and Notices of the Federal Government

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.
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 SS 620.5 and makes other technical changes.
DATES: Effective Date--This regulation will be effective 30 days after publication in theFederal Registerduring which either or both Houses of Congress are in session. We will publish a notice of the effective date in theFederal Register.

Compliance Date--All provisions of this rule require compliance on the effective date, except advisory votes on compensation increases under SS 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 § 620.5(h) through (k); new § 620.6] 2. Enhanced Disclosures of Senior Officer Compensation [new § 620.6(c)] a. Pension Benefits Table [§ 620.6(c)(4)] b. Discussion Related to Compensation Programs of Senior Officers [§ 620.6(c)(5)] c. Tax Reimbursements [§ 620.6(c)(3)] d. Disclosure of Plans [§ 620.6(c)(5)] 3. Compensation Committee Responsibilities [§§ 620.31 and 630.6(b)] 4. Notice to Shareholders [§§ 620.10, 620.11, 620.15, and 620.17] 5. Non-binding, Advisory Vote by Shareholders on Senior Officer Compensation [§§ 611.100, 620.5(a)(11) and 630.20(i); new §§ 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 [§ 620.5(e)] 7. Miscellaneous [§§ 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.

1Public Law 92-181, 85 Stat. 583 (1971), 12 U.S.C. 2001,et seq.

212 U.S.C. 2252(a)(8), (9) and (10).

3Public Law 102-552, 106 Stat. 4131 (1992).

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.

4Copies of the resolution may be obtained by contacting the FCA.

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:

5 See75 FR 70619 (Nov. 18, 2010).

• 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

6 See77 FR 3172 (Jan. 23, 2012).

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.

7The FCA extended the original 60-day comment period at the request of interested parties.See77 FR 16485 (Mar. 21, 2012).

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.

8Regulatory Philosophy, 76 FR 54638 (Sept. 1, 2011), effective July 8, 2011.

9E.O. 13563, “Improving Regulation and Regulatory Review,” dated January 18, 2011, and E.O. 13579, “Regulation and Independent Regulatory Agencies,” dated July 11, 2011.

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.

10Executive 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.

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.

11 See75 FR 64728, Oct. 20, 2010.

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.

1212 U.S.C. 2252(a)(8).

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 FCAuses 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.

13“The Director's Role: A Guide to Leading Your Institution Effectively,” (FCA publication,www.fca.gov).

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,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.

14Section 1.1 of the Act (12 U.S.C. 2001).

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 § 620.5(h) through (k); new § 620.6]

We proposed moving the disclosure requirements for directors and senior officers to new § 620.6. Also, we proposed that § 620.5(h) contain a reference to § 620.6, stating that the presentation of the § 620.6 disclosures would continue to be required in the annual report. No changes to the current requirements of existing § 620.5(h), (j), and (k) were made, except to remove redundancy and enhance clarity in the regulatory language in existing § 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 § 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

15This 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.”See51 FR 21336 (June 12, 1986).

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 § 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.

16The 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.See51 FR 21336 (June 12, 1986). This threshold limit was removed in the 2006 governance rulemaking.See71 FR 5740 (February 2, 2006).

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 § 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.

1759 FR 37406 (July 22, 1994).

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 § 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 atechnical 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 § 619.9335 definition of supplemental retirement plans.

2. Enhanced Disclosures of Senior Officer Compensation [new § 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 § 619.9130 to only include the CEO18 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.

18Use of the title “Chief Executive Officer” includes all persons occupying that position or similar positions, regardless of the actual title used.See12 CFR 619.9130.

19 Seegovernance rulemaking adding definition, 71 FR 5740 (Feb. 2, 2006).

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 [§ 620.6(c)(4)]

We proposed a new § 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 § 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 toinvestors. Therefore, the final rule at § 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 § 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 § 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 § 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 § 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 § 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 [§ 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 § 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 [§ 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 proposea 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 [§ 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 [§§ 620.31 and 630.6(b)]

In 2006, the FCA issued the governance rule requiring institutions to establish compensation committees.20 In the 2009 FCA Bookletter BL-060, “Compensation Committees,” we provide guidance on how a compensation committee should fulfill its obligations to the institution and shareholders. BL-060 was issued at a time of heightened concern and scrutiny on senior officer compensation. Continued scrutiny of, and concern regarding, compensation and retirement practices requires us to continue our prudent and proactive approach regarding regulation of compensation committee oversight responsibilities, including key factors identified in BL-060. We proposed requiring the compensation committee analyze or review its institution's:

20 See71 FR 5740 (Feb. 2, 2006).

• Long-term compensation and retirement benefit obligations and determine they are appropriate to the services performed and not excessive;

• Incentive-based compensation programs and payments and determine they are structured to consider future losses and risks to the institution;

• Senior officer compensation and incentive-based programs and determine they support the long-term strategy and promote safe and sound business practices; and

• Compensation programs for other select groups of employees.

Most commenters responded that the proposed requirements were too prescriptive and too rigid and did not follow a principles-based approach. Commenters stated that the guidance provided in BL-060 was adequate and that it provided the flexibility to adopt best practices. Commenters emphasized that BL-060 provided needed flexibility not apparent in the rule for institutions of various sizes and with different compensation programs. Commenters suggested that we follow other financial regulators and require the adoption of policies and use our examination authority to verify compliance with the bookletter.

The responsibilities required by this rulemaking are derived from key factors identified in BL-060 and, therefore, we do not believe the requirements in the rule are more rigid than the BL-060 guidance. For example, a key factor discussed in BL-060 is that a compensation committee should be able to fully analyze and justify the long-term liability to the institution in developing compensation packages and evaluate that incentive programs are based on long-term financial performance and are consistent with prudent risk-taking and produce a safe and sound outcome. Also, another key factor discussed is the committee's responsibility to ensure that retirement benefits are appropriate and not excessive. Further, we believe it is prudent to ensure these minimum responsibilities provided as informal guidance in BL-060 are incorporated into our regulations and routinely considered by the compensation committee when performing its duties. However, in consideration of the comments received, the final rule clarifies that compensation committees must document that the minimum responsibilities identified in the rule were considered when performing its duties.

Commenters discussed the perceived potential impact on the use of short- and long-term compensation programs under the rule. One commenter also questioned if the rule intended to require the use of claw-back provisionsto 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 § 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.

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

Commenters claimed the rule would create undue costs and burdens for compensation committees. We believe this rule captures existing guidance and therefore will not cause undue additional costs and burdens. Commenters questioned whether the compensation committee should conduct a pre- or post-review of compensation plans. We would expect that the dynamic and sometimes complex nature of compensation plans require ongoing review by the committee. The rule is silent on when the committee should review compensation plans and allows it to carry out its responsibilities as it considers appropriate and necessary to fulfilling its stewardship role and fiduciary duties.

4. Notice to Shareholders [§§ 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 § 620.15(a)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

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

• Discuss how the institution will determine materiality and significance.

We expect the policy to provide sufficient guidance to ensure consistent reporting in notices of similar events. Also, the final rule adopts at § 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

23As considered appropriate and relevant by the board, disclosure may or may not include the reason for the departure of a director prior to the end of his or her term of office or for the departure of a senior officer. For example, the planned departure of a senior officer may not rise to the level of materiality or significance to require notice if the departure was part of an institution's established succession plan.

• Letters of intent to merge;

• A change in the external auditor engaged to audit the institution's financial statements;

• A change in an external party engaged to perform internal audit functions, if the change was due to a disagreement with the party over the results or findings from the work performed; and

• Reportable FCA supervisory and enforcement actions.

The final rule requires that, at a minimum, this part of the policy include the events that would be covered under the existing definitions for “material” and “significant” contained in § 620.1. One commenter stated the definitions of “material” and “significant” in § 620.1(h) and (q) are vague and subjective. We do not agree that the § 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 re