83 FR 42807 - Organization; Definitions; Eligibility Criteria for Outside Directors

FARM CREDIT ADMINISTRATION

Federal Register Volume 83, Issue 165 (August 24, 2018)

The Farm Credit Administration (FCA, we, or our) is proposing to amend its regulations affecting the governance of Farm Credit System (System) institutions. The proposed rule would modify the existing outside director eligibility criteria by expanding the list of persons who would be excluded from nomination for an outside director's seat to ensure the independence of outside directors.

[Federal Register Volume 83, Number 165 (Friday, August 24, 2018)]
[Proposed Rules]
[Pages 42807-42810]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2018-18312]


=======================================================================
-----------------------------------------------------------------------

FARM CREDIT ADMINISTRATION

12 CFR Parts 611 and 619

RIN 3052-AC97


Organization; Definitions; Eligibility Criteria for Outside 
Directors

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: The Farm Credit Administration (FCA, we, or our) is proposing 
to amend its regulations affecting the governance of Farm Credit System 
(System) institutions. The proposed rule would modify the existing 
outside director eligibility criteria by expanding the list of persons 
who would be excluded from nomination for an outside director's seat to 
ensure the independence of outside directors.

DATES: You may send comments on or before October 23, 2018.

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 website. As 
facsimiles (fax) are difficult for us to process and achieve compliance 
with section 508 of the Rehabilitation Act of 1973, as amended, we do 
not accept comments submitted by fax. Regardless of the method you use, 
please do not submit your comment multiple times via different methods. 
You may submit comments by any of the following methods:
     Email: Send us an email at [email protected].
     FCA website: 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: Barry F. Mardock, Deputy Director, Office of 
Regulatory Policy, 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 from our website at http://www.fca.gov. Once you 
are in the website, select ``Public Commenters,'' then ``Public 
Comments,'' and follow the directions for ``Reading Submitted Public 
Comments.'' We will show your comments as submitted, but for technical 
reasons we may omit items such as logos and special characters. 
Identifying information 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:
    Darius Hale, Senior Policy Analyst, Office of Regulatory Policy, 
(703) 883-4165, TTY (703) 883-4056, [email protected], or
    Nancy Tunis, Senior Counsel, Office of General Counsel, (703) 883-
4061, TTY (703) 883-4056, [email protected].

SUPPLEMENTARY INFORMATION:

I. Objectives

    The objectives of this proposed rule are to:
     Amend the eligibility criteria for outside director in 
Sec.  611.220(a);
     Remove the definition of outside director in Sec.  
619.9235;
     Strengthen the safety and soundness of System 
institutions;
     Strengthen the independence of System institution boards; 
and
     Incorporate many of the best corporate governance 
practices for System institutions.

[[Page 42808]]

II. Background

    The Farm Credit Act of 1971, as amended (Act),\1\ establishes that 
System banks and associations must elect a board of directors with such 
qualifications as may be required by the institution's bylaws. 
Additionally, the Act specifies that at least one member must be 
appointed by the stockholder-elected directors and that such member 
must not be a director, officer, employee, agent, or stockholder of a 
System institution.\2\
---------------------------------------------------------------------------

    \1\ Pub. L. 92-181, 85 Stat. 583.
    \2\ Sections 1.4, 2.1, 2.11, 3.2, 3.21(b)(1)(C) and 
7.12(c)(3)(A) of the Act.
---------------------------------------------------------------------------

    Outside directors are appointed by stockholder-elected directors to 
provide independent perspective and expertise in appropriate areas. 
Outside directors achieve this by broadening the board's collective 
knowledge, enhancing the board's independence, and improving the 
board's ability to carry out its fiduciary duties to the System 
institution, stockholders and investors. Current FCA regulations, 
however, do not specify how far removed from the statutory prohibited 
relationships the outside director candidate must be to adequately 
fulfill the intended independent role of an outside director. This 
proposed rule seeks to clarify the eligibility requirements of an 
outside director to achieve the independence intended by the statutory 
requirements.

III. Section-by-Section Analysis of Proposed Regulatory Changes

A. Definitions [New Sec.  611.220(a)]

    As a result of the proposed changes in eligibility criteria for 
outside directors in Sec.  611.220, discussed below, we are proposing 
to add a new definition section in Sec.  611.220 that would only apply 
to that section. The newly defined terms are meant to provide clarity 
on the meaning of the new outside director eligibility criteria.
    The proposed rule would add affiliated organizations to the 
definitions in Sec.  611.220. The new term affiliated organization is 
defined to mean an entity that is legally distinct from any System 
institution, but is organized and operated for the benefit of, and in 
support of, an institution and conducts activities that advance the 
mission of an institution.
    The proposed rule would add borrowers to the list of persons 
excluded from consideration for an outside director position under 
Sec.  611.220. Accordingly, the new term borrower is added to the 
definitions in Sec.  611.220 and is defined to mean an individual, sole 
proprietorship, partnership, joint venture, trust, corporation, or 
other business entity to which an institution has made a loan or a 
commitment to make a loan or purchased a loan or participation interest 
in a loan. The new term borrower would also include any person or 
entity to whom an institution has made a lease or a commitment to make 
a lease, or who guarantees repayment of a loan.
    The proposed rule would add controlling interest to the definitions 
in Sec.  611.220. The new term controlling interest is defined to mean 
an individual that, directly or indirectly, or acting through or in 
concert with one or more persons:
    (1) Owns 5 percent or more of the equity in an entity;
    (2) Owns, controls, or has the power to vote 5 percent or more of 
any class of voting securities of an entity; or
    (3) Has the power to exercise a controlling influence over the 
management of policies of such entity. The new term controlling 
interest is consistent with the definition of controlled entity found 
in Sec.  612.2130(c). The proposed rule would add the new term entity 
to the definitions in Sec.  611.220. The new term entity means a 
corporation, company, association, firm, joint venture, partnership 
(general or limited), society, joint stock company, trust (business or 
otherwise), fund, or other organization or institution. This is 
consistent with the definition of entity found in Sec.  612.2130(e).
    The proposed rule would add the new term immediate family member to 
the definitions in Sec.  611.220. The new term immediate family member 
is defined to mean spouse, parent(s), sibling(s), children, mother(s)- 
and father(s)-in-law, brother(s)- and sister(s)-in-law, and son(s)- and 
daughter(s)-in-law. This is consistent with the definition of immediate 
family member found in Sec.  620.1(e).
    As a result of the proposed changes in eligibility criteria for an 
outside director in Sec.  611.220, we are proposing to delete the 
definition of outside director in Sec.  619.9235. The current 
definition in Sec.  619.9235 is not consistent with the changes 
proposed in Sec.  611.220, and it is unnecessary to duplicate the same 
language as is proposed in that section. Deleting Sec.  619.9235 will 
provide clarity in who may serve as an outside director and will avoid 
redundancy.

B. Eligibility Criteria of Outside Directors [New Sec.  611.220(b)]

    We propose modifying the existing outside director eligibility 
criteria in Sec.  611.220(a) \3\ by expanding the list of persons who 
would be excluded from nomination for an outside director's seat. The 
proposed rule would add the following to the list of persons excluded 
from consideration for an outside director position:
---------------------------------------------------------------------------

    \3\ Due to the addition of a new Definitions paragraph in Sec.  
611.220, we will re-designate the current Sec.  611.220(a) as Sec.  
611.220(b) for Eligibility, Number, and Term.
---------------------------------------------------------------------------

    (1) Borrowers of the institution;
    (2) Immediate family members of any director, officer, employee, 
agent, stockholder or borrower of a System institution; and
    (3) Anyone who has a controlling interest in:
    (i) An entity that borrows from a System institution; or
    (ii) An affiliated organization of a System institution.
    The purpose of expanding those individuals ineligible to serve in 
the outside director's role is to further strengthen the independence 
perspective on each System institution's board. Congress' intent on 
establishing the outside director role was to ensure an independent 
voice was brought to the boards of System institutions. As such, 
outside directors are only permitted to serve on the board of directors 
of one System institution or affiliated organization at a time.\4\
---------------------------------------------------------------------------

    \4\ An agricultural credit association and its wholly owned 
subsidiary associations are treated as a single entity for 
examination and regulatory purposes. Therefore, there is no conflict 
with a director sitting on the board of an ACA and its wholly owned 
subsidiary associations.
---------------------------------------------------------------------------

    To maintain that independent voice, current FCA regulations specify 
that a candidate for outside director should not be a stockholder of a 
System institution. However, the regulations do not specifically 
exclude a borrower from serving as an outside director. Borrowers may 
not necessarily be stockholders in a System institution. We believe 
that to be truly independent of a System institution when being vetted 
for an outside director's seat, all borrowers should be specifically 
excluded from consideration. This addition would capture those 
individuals who have signed a promissory note in a joint capacity 
(i.e., co-applicant, guarantor), but do not own System stock.
    To further ensure independence from System institutions, we propose 
excluding individuals from serving as an outside director if they have 
an immediate family member who is a director, officer, employee, agent, 
stockholder, or a borrower of a System institution. This would provide 
additional clarity to our existing rule as

[[Page 42809]]

to which individuals would be ineligible to serve as an outside 
director.
    We also propose that a person who has a controlling interest in an 
entity that borrows from a System institution or an affiliated 
organization of a System institution should not be eligible to serve as 
an outside director. Those persons who have a controlling stake in, or 
influence the decisions of, an entity should not be considered to serve 
as an outside director if that entity is a borrower of a System 
institution. A person who maintains a controlling interest in an entity 
who borrows from the System or in an affiliated organization does not 
have the independence meant to fill the outside director's role. The 
proposed rule would not limit employees of entity borrowers or 
affiliated organizations from consideration as an outside director. 
Instead, it aims to clarify that those persons who control or advance 
the financial or policy decisions of an entity, borrower, or affiliated 
organization must not be considered as an outside director because 
their controlling stake or position in the entity or affiliated 
organization could lessen their independence.
    We believe that expanding the list of those excluded from outside 
director consideration will further improve the board's ability to 
carry out its fiduciary responsibilities to the System institution and 
its stockholders and investors. We do not believe that including 
additional eligibility criteria would adversely affect the board's 
ability to select a qualified candidate for an outside director seat.

IV. Compliance Date

    System institutions would be required to comply with the changes in 
the eligibility criteria of outside directors at the next appointment 
of an outside director candidate after the effective date of the final 
rule. We invite your specific comments on the compliance timeframe if 
this rule becomes a final rule. If a later compliance date is 
suggested, please provide a specific burden that would be alleviated 
with any later compliance date.

V. Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act (5 
U.S.C. 601 et seq.), FCA hereby certifies that the proposed rule will 
not have a significant 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, System institutions are not ``small entities'' as defined in 
the Regulatory Flexibility Act.

List of Subjects

12 CFR Part 611

    Agriculture, Banks, banking, Conflict of interests, Crime, 
Investigations, Rural areas.

12 CFR Part 619

    Agriculture, Banks, banking, Rural areas.

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

PART 611--ORGANIZATION

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

    Authority: Secs. 1.2, 1.3, 1.4, 1.5, 1.12, 1.13, 2.0, 2.1, 2.2, 
2.10, 2.11, 2.12, 3.0, 3.1, 3.2, 3.3, 3.7, 3.8, 3.9, 3.21, 4.3A, 
4.12, 4.12A, 4.15, 4.20, 4.21, 4.25, 4.26, 4.27, 4.28A, 5.9, 5.17, 
5.25, 7.0-7.13, 8.5(e) of the Farm Credit Act (12 U.S.C. 2002, 2011, 
2012, 2013, 2020, 2021, 2071, 2072, 2073, 2091, 2092, 2093, 2121, 
2122, 2123, 2124, 2128, 2129, 2130, 2142, 2154a, 2183, 2184, 2203, 
2208, 2209, 2211, 2212, 2213, 2214, 2243, 2252, 2261, 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 611.220 is revised to read as follows:


Sec.  611.220  Outside directors.

    (a) Definitions. For purposes of this section, the following 
definitions apply:
    (1) Affiliated organization means an entity that is legally 
distinct from any Farm Credit System institution, but is organized and 
operated for the benefit of, and in support of, an institution and 
conducts activities that advance the mission of an institution.
    (2) Borrower means an individual, sole proprietorship, partnership, 
joint venture, trust, corporation, or other business entity to which an 
institution has made a loan or a commitment to make a loan or purchased 
a loan or participation interest in a loan. The term borrower also 
includes any person or entity to whom an institution has made a lease 
or a commitment to make a lease, or who guarantees repayment of a loan.
    (3) Controlling interest means an individual that, directly or 
indirectly, or acting through or in concert with one or more persons:
    (i) Owns 5 percent or more of the equity in an entity;
    (ii) Owns, controls, or has the power to vote 5 percent or more of 
any class of voting securities of an entity; or
    (iii) Has the power to exercise a controlling influence over the 
management of policies of such entity.
    (4) Entity means a corporation, company, association, firm, joint 
venture, partnership (general or limited), society, joint stock 
company, trust (business or otherwise), fund, or other organization or 
institution.
    (5) Immediate family member means spouse, parent(s), sibling(s), 
children, mother(s)- and father(s)-in-law, brother(s)- and sister(s)-
in-law, and son(s)- and daughter(s)-in-law.
    (b) Eligibility, number and term--(1) Eligibility. Eligibility to 
serve, and continue serving, as an outside director requires 
independence from affiliations with the Farm Credit System. Farm Credit 
banks and associations must make a reasonable effort to select outside 
directors possessing some or all of the desired director qualifications 
identified pursuant to Sec.  611.210(a).
    (i) No candidate for an outside director position may be a 
director, officer, employee, agent, stockholder, or borrower of an 
institution in the Farm Credit System or be an immediate family member 
of any of the above. An outside director candidate or an immediate 
family member of such candidate must not have a controlling interest 
in:
    (A) An entity that borrows from a System institution; or
    (B) An affiliated organization of a System institution.
    (ii) At any given time, an outside director is eligible to serve on 
the board of directors of only one Farm Credit System institution or 
affiliated organization.
    (2) Number. Stockholder-elected directors must constitute at least 
60 percent of the members of each institution's board.
    (i) Each Farm Credit bank must have at least two outside directors.
    (ii) Associations with total assets exceeding $500 million as of 
January 1 of each year must have no fewer than two outside directors on 
the board. However, this requirement does not apply if it causes the 
percent of stockholder-elected directors to be less than 75 percent of 
the board.
    (iii) Associations with $500 million or less in total assets as of 
January 1 of each year must have at least one outside director.
    (3) Terms of office. Banks and associations may not establish a 
different term of office for outside directors than that established 
for stockholder-elected directors.
    (c) Removal. Each institution must establish and maintain 
procedures for removal of outside directors. When the

[[Page 42810]]

removal of an outside director is sought before the expiration of the 
outside director's term, the reason for removal must be documented. An 
institution's director removal procedures must allow for removal of an 
outside director by a majority vote of all voting stockholders voting, 
in person or by proxy, or by a two-thirds majority vote of the full 
board of directors. The outside director subject to the removal action 
is prohibited from voting in his or her own removal action.

PART 619--DEFINITIONS

0
3. The authority citation for part 619 continues 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.


Sec.  619.9235  [Removed]

0
4. Remove Sec.  619.9235.

    Dated: August 21, 2018.
Dale L. Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2018-18312 Filed 8-23-18; 8:45 am]
 BILLING CODE 6705-01-P