Skip to Content


Organization; Funding and Fiscal Affairs, Loan Policies and Operations, and Funding Operations; Stock Issuances

Document Details

Information about this document as published in the Federal Register.

Published Document

This document has been published in the Federal Register. Use the PDF linked in the document sidebar for the official electronic format.

Start Preamble


Farm Credit Administration.


Final rule.


In this final rule, we amend regulations to allow Farm Credit System (System) service corporations to sell stock to non-System entities, provide adequate disclosures to investors in service corporations, and allow System institutions to issue unlimited amounts of certain classes of equities.

The purpose of our amendments is to provide System institutions additional opportunities to fulfill their borrowers' needs through service corporations and more efficient issuance of equities related to earnings distributions and transfers of capital.


This regulation will become effective 30 days after publication in the Federal Register during which either one or both houses of Congress are in session. We will publish a notice of the effective date in the Federal Register.

Start Further Info


Dale Aultman, Policy Analyst, Office of Policy and Analysis, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-4498, TDD (703) 883-4444, or Howard Rubin, Senior Attorney, Office of General Counsel, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TDD (703) 883-4444.

End Further Info End Preamble Start Supplemental Information


I. Objectives

The objectives of the final rule are to:

  • Increase the flexibility and usefulness of service corporations;
  • Provide adequate disclosures to investors in service corporations organized to exercise the authorities granted by title VIII of the Farm Credit Act of 1971, as amended (Act); and
  • Provide flexibility for the efficient distribution of a System institution's earnings and timely transfers of capital to a System association. Start Printed Page 16842

I. Background

A. Incorporation of Service Corporations

On August 18, 1998, we published a notice in the Federal Register that invited System institutions and the public to identify existing regulations and policies that impose unnecessary burdens on the FCS. (See 63 FR 44176, Aug. 18, 1998.) [1] We received comment on § 611.1135, which allows only System banks and associations to own stock in service corporations. Commenters requested that we allow more flexibility in creating and operating service corporations by allowing non-System institutions to own part of the service corporation.

On December 23, 1999, we published proposed amendments to our service corporation and capital bylaw regulations. (See 64 FR 72042, Dec. 23, 1999.) We proposed an amendment to § 611.1135 to allow service corporations formed by System banks or associations to issue equity to persons or entities who are not System institutions. We also proposed that non-voting stock may be issued in unlimited amounts as long as the issuance is consistent with the service corporation's bylaws. However, we proposed a limit on the total amount of voting stock that could be issued to non-System persons. We proposed that System institutions hold at least 80 percent of the voting stock of their service corporations at all times.

We also asked for comment on § 611.1137. That regulation allows service corporations to be organized to act as agricultural mortgage marketing facilities by selling loans in the secondary market. It requires that one or more System institutions hold at least 80 percent of the voting stock of their title VIII service corporations at all times. We asked if the 80-percent requirement provides adequate flexibility and usefulness of title VIII service corporations.

The only commenter to our proposal and request for comments for §§ 611.1135 and 611.1137 was the Farm Credit Council (Council), which represents Farm Credit System institutions. The Council supported our proposal to allow the issuance of unlimited amounts of non-voting stock. However, the Council requested that we change our proposed requirement that System institutions hold at least 80 percent of voting stock. The Council suggested that we require System institutions hold at least 51 percent of voting stock to improve opportunities for System institutions to join with non-System entities in service corporation ventures. The Council noted that if FCA had concerns with System institutions losing control, we could require that of the 49 percent of voting stock potentially held by non-System persons, no one person could hold more than 25 percent of total voting stock. Our final rule provides that System institutions own 80 percent or more of a service corporation's voting stock. We continue to believe this percentage requirement helps System institutions in controlling their service corporation yet provides flexibility to make service corporations more useful to Farm Credit System institutions and borrowers.

The Council also requested that we allow a service corporation to generate up to 30 percent of its annual earnings from activities not specifically authorized by the Act. However, section 4.25 of the Act allows service corporations only to perform the functions or services that the System institution organizing the service corporation is authorized to perform.[2] Therefore, if System institutions were not authorized to perform certain activities, their service corporation would also not be authorized.

On December 23, 1999, we also proposed that the service corporations described in §§ 611.1135 and 611.1137 must provide adequate disclosure when issuing stock to persons other than System institutions. (See 64 FR 72042, Dec. 23, 1999.) We proposed to apply the disclosure requirements of § 615.5250(c) and (d) to such stock issuances. Final § 611.1137(b) clarifies that the disclosure requirements apply to title VIII service corporations. Additionally, System institutions must determine if disclosures are required by other applicable Federal or state securities laws. While amending §§ 611.1135 and 611.1137, we took the opportunity to write them in plain language. We also rewrote § 611.1136 in plain language. That section covers examination of incorporated service corporations and unincorporated service organizations. We did not receive any comments to our proposed disclosure requirements or plain language revisions.

B. Capitalization Bylaws

Section 615.5220(a)(3) of our regulations requires that System institutions' bylaws specify the number of shares that will be issued for each class of equities.[3] Over the years, several institutions have expressed that this regulation often results in a burden on System institutions because the institution cannot estimate in advance the number of shares that will be issued to an association's funding bank or to borrowers for the purpose of distributing earnings. They point out that since these types of equities do not dilute a System institution's shareholder equity, the bylaws should not be required to specify the number authorized.

Our December 23, 1999, proposal contained an amendment to § 615.5220(a)(3) to allow System institutions to adopt bylaws that provide for issuance of these equities in unlimited amounts. (See 64 FR 72042, Dec. 23, 1999.) The proposal provided for the issuance of unlimited amounts of:

  • Non-voting stock that an association issues to its funding bank in exchange for the bank transferring capital pursuant to § 615.5171; and
  • Equities that institutions provide to borrowers for the sole purpose of distributing an institution's earnings.[4]

The only commenter to this proposal was the Council. The Council requested that we provide a definition for “earnings.” We decided not to include a definition for earnings because to do so may be unnecessarily restrictive and burdensome. We believe the term “earnings” is sufficiently understood by financial institutions, and therefore the final rule can be applied without difficulty.

C. Technical Change

Currently, § 615.5250(c)(2) regarding disclosure statements for issuance of stock contains a typographical reference error. The final rule corrects the reference to § 615.5250(c)(1) rather than § 615.5250(d)(1).

Start List of Subjects

List of Subjects in 12 CFR Parts 611 and 615

  • Accounting
  • Agriculture
  • Banks, banking
  • Government securities
  • Investments
  • Rural areas
End List of Subjects

For the reasons stated in the preamble, parts 611 and 615 of chapter VI, title 12 of the Code of Federal Regulations are amended to read as follows:

Start Part Start Printed Page 16843


End Part Start Amendment Part

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

End Amendment Part Start Authority

Authority: Secs. 1.3, 1.13, 2.0, 2.10, 3.0, 3.21, 4.12, 4.15, 4.20, 4.21, 5.9, 5.10, 5.17, 7.0-7.13, 8.5(e) of the Farm Credit Act (12 U.S.C. 2011, 2021, 2071, 2091, 2121, 2142, 2183, 2203, 2208, 2209, 2243, 2244, 2252, 2279a-2279f-1, 2279aa-5(e)); secs. 411 and 412 of Pub. L. 100-233, 101 Stat. 1568, 1638; secs. 409 and 414 of Pub. L. 100-399, 102 Stat. 989, 1003, and 1004.

End Authority Start Amendment Part

2. Revise subpart I to read as follows: 2

End Amendment Part
Subpart I—Service Organizations
Incorporation of service corporations.
Regulation and examination of service organizations.
Title VIII service corporations.

Subpart I—Service Organizations

Incorporation of service corporations.

(a) What is the process for chartering a service corporation? A Farm Credit bank or association (you or your) may organize a corporation acting alone or with other Farm Credit banks or associations to perform, for you or on your behalf, any function or service that you are authorized to perform under the Act and Farm Credit Administration (we, us, or our) regulations, with two exceptions. Those exceptions are that your corporation may not extend credit or provide insurance services. To organize a service corporation, you must submit an application to us following the applicable requirements of paragraph (c) of this section. If what you propose in your application meets the requirements of the Act, our regulations, and any other conditions we may impose, we may issue a charter for your service corporation making it a federally chartered instrumentality of the United States. Your service corporation will be subject to examination, supervision, and regulation by us.

(b) Who may own equities in your service corporation? All Farm Credit banks and associations are eligible to become stockholders in your service corporation. Your service corporation may also issue non-voting and voting stock to persons that are not Farm Credit institutions, provided that at least 80 percent of the voting stock is at all times held by Farm Credit institutions. For the purposes of this subpart, we define persons as individuals or legal entities organized under the laws of the United States or any state or territory thereof.

(c) What must be included in your application to form a service corporation? Your application for a corporate charter must include:

(1) The certified resolution of the board of each organizing bank or association authorizing the incorporation;

(2) A request signed by the president(s) of the organizing bank(s) or association(s) to us to issue a charter, supported by a detailed statement demonstrating the need and the justification for the proposed entity; and

(3) The proposed articles of incorporation addressing, at a minimum, the following:

(i) The name of your corporation;

(ii) The city and state where the principal offices of your corporation are to be located;

(iii) The general purposes for the formation of your corporation;

(iv) The general powers of your corporation;

(v) The procedures for a Farm Credit bank or association or persons that are not Farm Credit institutions to become a stockholder;

(vi) The procedures to adopt and amend your corporation's bylaws;

(vii) The title, par value, voting and other rights, and authorized amount of each class of stock that your corporation will issue and the procedures to retire each class;

(viii) The notice and quorum requirement for a meeting of shareholders, and the vote required for shareholder action on various matters;

(ix) The procedures and shareholder voting requirements for the merger, voluntary liquidation, or dissolution of your corporation or the distribution of corporate assets;

(x) The standards and procedures for the application and distribution of your corporation's earnings; and

(xi) The length of time your corporation will exist.

(4) The proposed bylaws, which must include the provisions required by § 615.5220(b) of this chapter;

(5) A statement of the proposed amounts and sources of capitalization and operating funds;

(6) Any agreements between the organizing banks and associations relating to the organization or the operation of the corporation; and

(7) Any other supporting documentation that we may request.

(d) What will we do with your application? If we approve your completed application, we will issue a charter for your service corporation as a corporate body and a federally chartered instrumentality. We may condition the issuance of a charter, including imposing minimum capital requirements, as we deem appropriate. For good cause, we may deny your application.

(e) Once your service corporation is formed, how are its articles of incorporation amended? Your service corporation's articles of incorporation may be amended in either of two ways:

(1) The board of directors of the corporation may request that we amend the articles of incorporation by sending us a certified resolution of the board of directors of the service corporation that states the:

(i) Section(s) to be amended;

(ii) Reason(s) for the amendment;

(iii) Language of the articles of incorporation provision, as amended; and

(iv) Requisite shareholder approval has been obtained. The request will be subject to our approval as stated in paragraphs (a) and (c) of this section.

(2) We may at any time make any changes in the articles of incorporation of your service corporation that are necessary and appropriate for the accomplishment of the purposes of the Act.

(f) When your service corporation issues equities, what are the disclosure requirements? Your service corporation must provide the disclosures described in § 615.5250(c) and (d) of this chapter.

Regulation and examination of service organizations.

(a) What regulations apply to a service organization? Because a service organization is formed by banks and associations, it is subject to applicable Farm Credit Administration (we, our) regulations.

(b) Who examines a service organization? We examine service organizations.

(c) What types of service organizations are subject to our regulations and examination? All incorporated service corporations and unincorporated service organizations formed by banks and associations are subject to our regulations and examination.

Title VIII service corporations.

(a) What is a title VIII service corporation? A title VIII service corporation is a service corporation organized for the purpose of exercising the authorities granted under title VIII of the Act to act as an agricultural mortgage marketing facility.

(b) How do I form a title VIII service corporation? A title VIII service corporation is formed and subject to the same requirements as a service corporation formed under § 611.1135, with one exception. The Federal Agricultural Mortgage Corporation or its Start Printed Page 16844affiliates may not form or own stock in a title VIII service corporation.

Start Part


End Part Start Amendment Part

3. The authority citation for part 615 continues to read as follows:

End Amendment Part Start Authority

Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12, 2.2, 2.3, 2.4, 2.5, 2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 4.3A, 4.9, 4.14B, 4.25, 5.9, 5.17, 6.20, 6.26, 8.0, 8.3, 8.4, 8.6, 8.7, 8.8, 8.10, 8.12 of the Farm Credit Act (12 U.S.C. 2013, 2015, 2018, 2019, 2020, 2073, 2074, 2075, 2076, 2093, 2122, 2128, 2132, 2146, 2154, 2154a, 2160, 2202b, 2211, 2243, 2252, 2278b, 2278b-6, 2279aa, 2279aa-3, 2279aa-4, 2279aa-6, 2279aa-7, 2279aa-8, 2279aa-10, 2279aa-12); sec. 301(a) of Pub. L. 100-233, 101 Stat. 1568, 1608.

End Authority

Subpart I—Issuances of Equities

Start Amendment Part

4. Amend § 615.5220 by revising paragraph (a)(3) to read as follows:

End Amendment Part
Capitalization bylaws.
* * * * *

(a) * * *

(3) The number of shares and par value of equities authorized to be issued for each class of equities. However, the bylaws need not state a number or value limit for these equities:

(i) Equities that are required to be purchased as a condition of obtaining a loan, lease, or related service.

(ii) Non-voting stock resulting from the conversion of voting stock due to repayment of a loan.

(iii) Non-voting equities that are issued to an association's funding bank in conjunction with any agreement for a transfer of capital between the association and the bank.

(iv) Equities resulting from the distribution of earnings.

* * * * *
Start Amendment Part

5. Amend § 615.5250(c)(2) by removing the reference to “(d)(1)” and adding in its place, the reference “(c)(1)”.

End Amendment Part Start Signature

Dated: March 21, 2001.

Kelly Mikel Williams,

Secretary, Farm Credit Administration Board.

End Signature End Supplemental Information


1.  On November 18, 1998, we extended the comment period to January 19, 1999. See 63 FR 64013 (Nov. 18, 1998).

Back to Citation

2.  Those exceptions are that service corporations cannot extend credit or provide insurance services.

Back to Citation

3.  There are two current exceptions to this requirement: (1) Non-voting stock that is converted from voting stock after the repayment of a loan; and (2) stock that is required to be purchased when obtaining a loan. In the final rule, we clarify that stock required to be purchased for leases and related services are also exempt.

Back to Citation

4.  Our final rule makes a technical change to clarify this sentence.

Back to Citation

[FR Doc. 01-7599 Filed 3-27-01; 8:45 am]