The Agricultural Credit Act of 1987,\1\ among other things, amended the Act expressly to permit System institutions to terminate their Farm Credit status and become another type of financial institution. We first issued regulations governing terminations in 1991. At that time, the regulations covered only ``small'' FCS associations. Our current termination rule, published on April 12, 2002, covers all associations and banks.\2\ Since 1991, no FCS bank or association has terminated its charter under FCA regulations. However, in 2004 one System association adopted a commencement resolution to terminate its Farm Credit charter and subsequently be acquired by the subsidiary of a nonSystem bank. Ultimately, the association decided not to be acquired and not to terminate Farm Credit status. Although the association never submitted a termination application to us, the experience presented us with an actual event to evaluate the effectiveness and efficiency of our existing termination regulations. We found that, while the existing regulations provide the basic requirements to comply with the Act and effect a termination, certain revisions to the regulations would ensure a more orderly process for a FCS bank or association to terminate its charter.
\1\ Public Law 100233, 101 Stat. 1568 (January 6, 1988). \2\ See 67 FR 17907.

On January 11, 2006, we published a proposed termination regulation \3\ to update the existing termination regulations to clarify our requirements. Our proposals included: (1) Separating our review of a terminating institution's disclosure information, as required by section 7.11 of the Act (12 U.S.C. 2279e), from our approval of the termination itself, as set forth in section 7.10 of the Act (12 U.S.C. 2279d), (2) giving a terminating institution more flexibility in communicating with stockholders and the public during the termination process, (3) providing that we may require a terminating institution to obtain independent analyses of and rulings on matters related to the proposed termination, as well as to hold convenient informational meetings for stockholders, (4) strengthening protections for directors to obtain independent legal and financial advice and allow public or private expressions of their opinions about the termination, and (5) ensuring sufficient equity holder representation in voting processes by imposing a quorum requirement of 30 percent of voting stockholders that must be present in person or by proxy at the stockholder meetings for the termination and reconsideration votes.
\3\ See 71 FR 1704.

III. Comments

We received 51 comment letters on the proposed rule. Eight comment letters were from the Farm Credit Council (FCC) and seven System institutions (U.S. AgBank, CoBank, AgriBank, and four FCS associations) (collectively, System commenters). We also received 43 comment letters from nonSystem entities including Rabobank International (Rabobank), a cooperatively owned bank and financial services provider based in the Netherlands; the Independent Community Bankers of America (ICBA); the Independent Community Bankers of North Dakota; the American Bankers Association (ABA) and from 39 commercial bankers. In its letter, Rabobank identified itself as the bank that attempted unsuccessfully to acquire a System institution in 2004 and stated that its comments were based on that experience. In general, System commenters supported the rule, whereas nonSystem commenters expressed opposition to portions of the rule that they believed would create barriers to the termination process and would be burdensome and costly.
A. General Comments

System commenters stated that:

NonSystem commenters stated that:
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B. Our Consideration of the Comments Received

Upon consideration of all comments, the FCA Board has decided to make a number of changes to the regulations. We note that some of the comments are beyond the scope of this regulatory project.

It is not our intention to put up barriers or create undue burden for an institution wanting to exit the System. The proposed changes are meant only to ensure that all important interests, including the interests of borrower/stockholders, are protected and to ensure that the Agency has all the information needed to make a decision about whether or not to approve the termination request.

One commenter suggested that restricting the right of an institution to exit the System and ``compete in the private sector'' could lead to a weakened financial condition, entrenched management and inefficient operations in that institution. We do not believe that the rule restricts an institution from exiting the System. Rather, it provides for a deliberative process to achieve a termination of System status by taking into consideration the interests of the institution, its stockholders, and the System. After careful consideration, we do not find that our regulatory framework for termination of System status has been detrimental to the financial wellbeing of the System and its member institutions. We note that System institutions continue to operate in a safe and sound manner under the authorities provided by the Act and FCA Regulations.

In addition to the specific comments received on the proposed termination regulation, some nonSystem entities provided comments on areas outside of the proposed rule, including the objectives of the Horizons Project, the mission of the System, and certain FCS institutions' patronage practices. Although these comments will be considered by the Agency generally, we will not respond to them in this final rule because they are beyond the scope of this rulemaking project.
IV. SectionbySection Analysis

Section 611.1200Applicability of This Subpart

We did not propose any changes to this section and we received no comments. We adopt this section as final without changes.

Section 611.1205Definitions That Apply in This Subpart

We proposed to define ``days'' to mean calendar days and ``business days'' to mean days on which the FCA is open for business. We also proposed to define ``equity holders'' to mean holders of stock, participation certificates, or other equities such as allocated equities.

We did not receive any comments on this section and adopt Sec. 611.1205 as final without changes.
Section 611.1210Advance NoticesCommencement Resolution and Notice to Equity Holders

We proposed requiring a terminating institution to send us a draft of its notice to equity holders before the notice is sent. If we do not request modifications to the draft notice within 2 business days of receiving it, the terminating institution may mail the notice to its equity holders. We also proposed requiring the terminating institution to place the advance notice to equity holders on its Web site and to send us copies of all contracts and agreements related to the termination. The proposed rule also requires the board of the terminating institution to vote on the termination at three separate times during the termination process.

We received comments from Rabobank, the ICBA, the ABA, and two groups of commercial bankers on the three votes required of the terminating institution's board of directors during the termination process. The first two votes are already required by the existing regulations. The first vote is the commencement resolution required by existing Sec. 611.1210(a), when the termination process begins. The second vote, required by existing Sec. 611.1220, specifies that the board must adopt a termination resolution before mailing the disclosure and termination plan to the FCA. The third (the new vote) is required by new Sec. 611.1235(a), which specifies that the board must adopt a reaffirmation resolution no more than 14 days before mailing the plan of termination, including the disclosure information, to its equity holders. All comments received on the three board resolutions are summarized here.

Rabobank commented that the threevote requirement does not support the stated purposes of the proposed rule, is burdensome, is not explained, and discourages a FCS institution from initiating a request. Rabobank asserted that the requirement is a ``de facto prohibition'' on exiting the System. The ICBA believed that the threevote requirement is unreasonable and proves FCA's intent to prevent any entity from leaving the System. The ICBA noted that other procedures will ensure that the terminating institution's board will thoroughly ``vet'' its decision. The ICBA also pointed out that the regulation is arbitrary and capricious, and contrary to the clear statutory language, as well as unnecessary and inappropriate. The ABA stated that a third vote by the board, after FCA approves the plan, is needless and a potentially costly additional step that is meant to slow or derail the process. The ICBA and two groups of commercial bankers stated that a termination is not such an ``extraordinary event'' that the board has to vote three times and that our purpose is to create obstacles. Another group of commercial bankers believed that the requirement creates hurdles on voting procedures not found in other businesses, diluting the principle of local control. One group of commercial bankers suggested that a more honest approach would be for FCA to withdraw the proposal and ask Congress to pass legislation preventing terminations from the System, even though it acknowledged it would not support such legislation. It also observed that a burdensome policy does not serve the public interest and reflects efforts on
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behalf of the FCC, the System's lobbying organization.

We stated in the preamble to the proposed rule that our objectives were to update the termination procedure and to ensure that an institution's board of directors, as well as FCA and the equity holders, have sufficient time to be fully informed about a termination proposal before deciding whether to approve the termination. The timing of each board resolution in the termination process is to ensure the directors are fully informed before taking the next significant step. A significant amount of time may elapse between adoption of the commencement resolution and submission of the termination plan to FCA for approval and distribution of the plan to stockholders prior to the stockholder vote. We believe that it is important and essential for the terminating board to validate its decision at these critical junctures and demonstrate continued support for the termination. The FCA and the terminating institution's equity holders need reassurance that the board of directors remains fully supportive of and committed to the termination throughout the process because we believe that a termination is an ``extraordinary event'' in the context of the System's congressionally mandated mission. The concept of local control is reinforced each time the board resolves to proceed with the termination process. The board can easily include its reaffirmation resolution with the disclosure and plan of termination at the time of mailing to its equity holders with a certified copy provided to FCA. For these reasons, we make no changes to the rule and adopt the provisions of Sec. Sec. 611.1210, 611.1220, and 611.1235(a) as proposed.

A System bank (AgriBank) commented on the advance notice provision in Sec. 611.1210(e) that allows a terminating bank to continue to participate in the issuance of consolidated and Systemwide obligations through the termination date. The bank stated that once a System bank announces its intent to exit, the remaining banks should no longer be required to assume the joint and several liability for the debts of that exiting bank and that to do otherwise requires all remaining banks to ignore the reality of the transaction for the sole benefit of the exiting bank. The commenter added that, at a minimum, the exiting bank should be prohibited from issuing joint debt for any purpose other than the refinancing of joint debt that matures during the period prior to the exit.

The FCA did not propose any change to the provision in Sec. 611.1210(e). We believe we must continue to allow funding for a terminating bank because, from a practical standpoint, a System bank does not have other available alternative funding sources until it terminates its System status.

Section 611.1211Special Requirements

We proposed a new section providing that we may require a terminating institution to obtain independent analyses or studies of and rulings on matters related to the proposed termination. We proposed that if expert analyses, studies, or rulings are needed, we will require a terminating institution to engage experts acceptable to us to perform such work. We further proposed that we may require such analyses, studies, or rulings, or summaries of them, be provided to equity holders as part of the plan of termination, or separately. We also proposed that we may require a terminating institution to hold regional or local informational meetings for equity holders during the time period after they receive notice of the proposed termination and before the stockholder vote on termination. Any meetings would be subject to the plain language requirements of proposed Sec. 611.1217(b) regarding balanced statements of anticipated benefits and potential disadvantages.

System commenters supported the FCA's proposal and encouraged FCA to require studies as needed. They asserted that the facts and circumstances of any particular termination request must be carefully evaluated and that an independent analysis of various issues raised by the request may be appropriate, including the impact on Systemwide debt holders, the cost and credit rating of Systemwide debt securities, tax aspects of the transaction, the valuation of dissenters' rights, the impact on other System institutions, and all the costs associated with either chartering a new institution to serve the applicable territory or amending the charters of other System institutions to serve it.

A nonSystem commenter (ICBA) stated that the broad scope of issues the FCA suggests studying are unwarranted and not reflective of the Act's intent. They asserted that the impact of a departure upon the System would be minimal because the System is adequately capitalized, any exit fee would remain with the System, and because the FCA has the necessary authorities to recharter territory vacated by the terminating institution. Other nonSystem commenters suggested that the FCA should not be able to impose special requirements, assessments, analyses, rulings or studies before approving a termination plan of a System institution without also having some time limit or limitation on the number of requests that FCA might make of an institution.

Under section 7.10 of the Act, the FCA Board has broad regulatory authority to impose other conditions, as it considers appropriate, upon an institution seeking to terminate its System status. As discussed in the proposed rule, a termination raises issues for the FCA that are both significant and nonroutine. Therefore, the FCA believes certain types of additional analysis or studies may be necessary or useful in evaluating a specific termination proposal. However, we believe that any requirements for special studies and analysis can be determined only on a casebycase basis after considering the nature of the termination request and the extent of any studies already conducted by the terminating institution. The FCA agrees with the commenter's assessment that the System is currently strongly capitalized, as well as the statement that the FCA would act to address any territorial void that may occur as the result of an approved termination. We disagree, however, with the assertion that the System and the terminating institution's stockholders would not be impacted by a termination. While these capitalization and territorial issues are clearly factors that would be considered in any termination request, they are not the only factors that need to be considered or issues that may require additional study in evaluating the impact of a termination on the institution's stockholders, the System and other parties. The FCA will act prudently in determining the nature and extent of any required studies or analyses but believes it is inappropriate to limit, by number or amount, the requirements that we may impose in this area.

Another nonSystem commenter (Rabobank) objected to this proposal asserting that the additional requirements for studies and analyses and for holding informational meetings for stockholders could delay the termination process for a significant period of time and the requirements would impose substantial costs on the terminating institution. They assert that the FCA has not balanced the costs and benefits of these proposed new requirements or shown that the existing informational requirements are insufficient. The commenter suggested that, to the extent these required studies examine the System and parties other
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than the terminating institution, these costs should be borne by the FCA, not by the institution.

It is not the FCA's intention to delay the termination process, nor do we believe that any delays resulting from these requirements would unduly extend the process. To the extent that special studies and analyses and informational stockholder meetings serve to extend the termination process, the FCA believes that this additional time is necessary to ensure that the stockholders of the terminating institution are fully informed as to the impact of the termination on their interests and that the FCA has the information it needs to deliberate appropriately on the issues and make a reasoned decision on the termination request.

The FCA is mindful of the costs of performing certain studies and analyses contemplated by this provision. The FCA concludes that the costs of studies and analyses related specifically to the impact of the termination on the institution and its stockholders are legitimate termination expenses that should be paid for by the institution and should not be deducted from the exit fee. However, there is merit to the commenter's suggestion that costs of studies that address issues regarding the impact of the termination on the System in general should be handled differently than studies that address the impact of the termination on the terminating institution and its stockholders. In response to this comment, in the final rule at Sec. Sec. 611.1250 and 611.1255, we provide that a terminating institution required by the FCA to engage independent experts to conduct any assessments, analyses, or studies, or to request rulings that examine the impact of the termination on the System and parties other than the terminating institution and its stockholders may exclude such related expenses from the other termination expenses added back to assets under the requirements of existing Sec. Sec. 611.1250(a)(4)(i) and
611.1255(a)(4)(i) pertaining to associations, and Sec. Sec. 611.1250(b)(5)(i)(A) and 611.1255(b)(5)(i)(A) pertaining to banks, when calculating the terminating institution's preliminary and final exit fees. This means that the exit fee would be reduced by an amount approximately equal to the cost of such excluded expenses. We believe this change balances the responsibilities of termination expenses for the terminating institution (and the successor institution) with benefits that would be obtained from studies that examine System issues related to the termination request.
Section 611.1215Communications With the Public and Equity Holders

We proposed a new section on communications. This section would permit a terminating institution to communicate with the public and with its equity holders during the termination process, provided that the written communications contain a legend urging equity holders to read the information statement and are filed with the FCA on the date of first use. If we believed any communications are inaccurate or misleading, we would require corrections to be made. We could also require a terminating institution to file written communications made by other participants in the termination and related transactions, such as a merger partner. The regulation contained a safe harbor for unintentional failures to make timely filings with the FCA and provided that communications that contain no new information from previously filed communications do not need to be filed.

We received comments on this proposed section from Rabobank, the ICBA, and a number of commercial bankers. Both Rabobank and ICBA supported allowing a terminating institution to communicate more freely with the public and equity holders during the termination process. All the commenters on this section recommended that we extend our monitoring of communications to additional parties. Rabobank recommended that the FCA monitor public communications about the termination made by other System institutions. ICBA recommended that we review for accuracy any information sent to the terminating institution's equity holders by parties opposed to the termination. The commercial bankers recommended that other System parties that oppose a termination should not be exempt from a requirement to disseminate accurate information. The FCA considered these recommendations but did not adopt them. While we do not support the dissemination of inaccurate information by any party, we believe that communications by the terminating institution require a higher level of scrutiny because of the disclosure requirements in section 7.11 of the Act, the fiduciary duties owed by the institution's management and directors to the institution's equity holders, and the institution's access to most all of the relevant facts surrounding a proposed termination. If a terminating institution believes other parties are making false and misleading statements, it will now be able to respond to such statements by means of public communications and direct correspondence with its equity holders. In addition, it is unlikely that parties other than the terminating institution's own equity holders would communicate directly with other equity holders. Under section 4.12A of the Act (12 U.S.C. 2184) and Sec. 618.8310(b) of our regulations, the institution's equity holders are the only parties entitled to obtain a stockholder list for communications about the termination. Furthermore, we do not believe it is necessary or practical to monitor
communications between equity holders.

The FCA adopts this section as proposed.
Section 611.1216Public Availability of Documents Related to the Termination

Proposed Sec. 611.1216 provides that we may post on our Web site, or require a terminating institution to post on its Web site, documents related to the termination. Disclosure of the documents will, at an early stage in the termination process, enable equity holders and others to understand the structure and ramifications of the plan of termination. We indicated in the preamble to the proposed rule that we expect the institution to post the board of directors' resolution on its Web site to commence the termination process, in addition to the notice to equity holders. We could require the posting of other documents such as charter documents of the successor institution or contracts entered into with a merger or acquisition partner. In addition, we could require the posting of the results of any special assessments, analyses, studies, and rulings. We stated that it was not our intention to require the posting of confidential information, and the terminating institution could request us to keep specific documents confidential.

The ICBA asserted that our proposal is designed to intimidate institutions from attempting to terminate and that the FCA does not have authority to deny a terminating institution's request to keep documents confidential. A number of commercial bankers also stated they disagreed with publishing sensitive information on the internet at the discretion of the Agency. A System commenter (AgriBank) stated its belief that the FCA, rather than the terminating institution, should determine whether information is confidential, and also that the information should be published on the FCA Web site.

After carefully considering the suggestions of the commenters, the FCA
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has decided to adopt the final regulation without changes from the proposed rule. The purpose of this provision is to ensure a broad dissemination of the significant termination documents to equity holders and the public. We intend generally to accord confidential treatment to termination documents to the same extent we accord confidentiality to other documents we receive from System institutions. As for whether the information is on the FCA's Web site or the terminating institution's Web site, our intention is to ensure the availability of terminationrelated information. We will make the determination of which Web site is most appropriate for stockholders to obtain all relevant information on a casebycase basis.

Section 611.1217Plain Language Requirements

We proposed to move the plain language requirements in existing Sec. 611.1223(a) to new Sec. 611.1217 and to apply them to all communications with equity holders required by these regulations, not just to the information statement. To help ensure a balanced presentation of the information, we also provided that communications describing the anticipated benefits of the proposed termination should also give similar prominence to the potential disadvantages of the termination.

We did not receive any comments on this section and adopt it as proposed.

Section 611.1218Role of Directors

In this proposed new section, we intended to emphasize the importance of directors in the termination process, not only when they take action on behalf of the terminating institution, but also when they act individually. First, we provided that directors could not be prohibited by confidentiality agreements or otherwise from publicly or privately commenting on a termination proposal and related transactions. In our view, such prohibitions would not be in the best interests of the equity holders because they prevent directors from consulting with the persons they represent and prevent equity holders from learning the opinions of those who should have the most detailed knowledge of the proposal. We noted that this provision would not permit directors to reveal trade secrets or confidential financial information that they would be prohibited from revealing in the absence of a confidentiality agreement or similar document.

We further proposed to provide that one or more directors have the right to obtain legal and financial advice on the proposed termination, and that the institution must pay reasonable expenses for such advice. This was intended to ensure that each director has the opportunity to obtain independent advice on the proposed transaction.

We received a number of comments on this proposal. AgriBank supported the provision on confidentiality agreements and suggested expanding it to prohibit curbs on communications by employees of the terminating institution, as well as to prohibit the terminating institution from requiring employees to express support for the termination as a condition of employment. AgriBank also stated that directors who obtain independent financial and legal advice should not be required to prove the reasonableness of their cost. Rabobank opposed permitting individual directors to seek independent legal and financial advice on a proposed termination and asserted that, if directors consulted outside parties for all board decisions, boards could no longer function. The ICBA found ``particularly objectionable'' our proposal to permit directors to obtain independent counsel and to permit directors to express their opinions about the termination publicly; the association also asserted that the Act does not authorize the FCA to override a legally binding confidentiality agreement. A number of commercial bankers expressed the view that our proposals in this section regarding directors' rights and in Sec. 611.1216 regarding the public availability of information about the termination have the sole purpose of placing hurdles in an institution's way in order to prevent it from leaving the System.

In response to these comments, the FCA has revised its proposal in Sec. 611.1218(b). In the final rule, we continue to provide that one or more directors of a terminating institution may seek independent advice on the termination, but we clarify when the board may deny payment of expenses for such advice. The board, by at least a two thirds vote of the full board (the total number of current directors), may deny payment of such expenses if it determines that the expenses are unreasonable. If payment is denied, the board must specify why the expenses are unreasonable, notify the FCA within 1 business day of the denial, and explain the reasons for its determination in the disclosure information submitted to equity holders. We believe that this revised procedure more appropriately balances the rights of directors to obtain independent advice with the rights of the institution to avoid using the institution's assets for unreasonable expenses.

We adopt the other provisions of this section as proposed. We disagree with the assertion that the Act does not authorize the FCA to override a ``legally binding'' confidentiality agreement. On the contrary, section 7.10(a)(7) specifically authorizes FCA to promulgate rules to govern the termination process. In addition, we do not support requiring employees, against their will or as a condition of employment, to express support for a termination to customers (who are also current or prospective equity holders of the institution). However, we are not persuaded that employees are likely to be coerced in that manner, and we note that employees are prohibited under Sec. 611.1219(a) from making misstatements or omissions of a material fact to equity holders. While we agree in principle that boards could not function, or would have difficulty functioning, if directors consulted outside parties for ``all board decisions,'' that is not what we proposed. Terminating status as a System institution is an extraordinary event, and it is likely to be equally extraordinary for the institution's directors, who by and large are farmers and ranchers. In this circumstance, we believe that providing for reimbursement of reasonable expenses for independent advice will help ensure that the board members act with full knowledge and understanding of the termination and its consequences. Similarly, we believe that enabling directors who oppose termination to express their opinions to equity holders and the public is consistent with the directors' duties to stockholders and will contribute to stockholders' more complete understanding of the proposed transaction.

Section 611.1219Prohibited Acts

We proposed to move existing Sec. 611.1215 to this new Sec. 611.1219. In Sec. 611.1219, we proposed to delete the reference to our preliminary approval of the termination, because we proposed to eliminate the preliminary approval provision. We also proposed to prohibit the institution and any director, officer, employee, and agent from making any untrue or misleading statement of a material fact, or failing to disclose any material fact to the FCA about the proposed termination and any related transactions. This prohibition already applied to statements made to or withheld from current or prospective equity holders.

Rabobank asserted that the FCA should also expressly prohibit untrue or
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misleading statements or omissions of a material fact by any System institution and should sanction institutions that violate the prohibition, stating that ``anything less would allow an opponent of a termination to galvanize opposition based on falsehoods and deception.'' Although the FCA strongly opposes the dissemination of misleading and deceptive information by any party, we have decided not to incorporate Rabobank's recommendation in the regulation. The terminating institution's directors, officers, employees and agents have specific legal duties to the terminating institution and, indirectly or directly, to its equity holders; other System institutions do not. Consequently, we will not extend the regulation's prohibition to them. We note that, under the communications provisions, the terminating institution will be free to respond publicly, or in correspondence with equity holders, to statements made by other parties.

We adopt this section in the final rule without any changes from the proposal.

Section 611.1220Termination Resolution

Proposed Sec. 611.1220 was an expansion of the requirement in existing Sec. 611.1220(a) for the board to adopt a termination resolution. We proposed that the board must adopt a resolution no more than 1 week before submitting the plan of termination to us. The resolution must: Indicate the board's continuing support for termination; authorize submission of the plan of termination to us; and (if we approve or take no action) authorize submission of the plan of termination to voting stockholders.

Except for comments on the three required board resolutions, we did not receive any comments on this specific provision and adopt Sec. 611.1220 as final without changes.
Section 611.1221Submission to FCA of Plan of Termination and Disclosure Information; Other Required Submissions

Proposed Sec. 611.1221 revised the existing regulation to provide that a terminating institution may not file a plan of termination until at least 30 days after the institution has sent the notice to equity holders under Sec. 611.1210(b). We also proposed to remove references to the Financial Assistance Corporation (FAC) because all outstanding FAC debt has been repaid.

We received one comment from the ICBA on the requirement that the terminating institution may not file its termination plan with FCA until at least 30 days after it mails the advance notice to its equity holders. The ICBA objected to FCA's applying an additional 30day waiting period and stated this requirement is unnecessary because FCA will determine when the 60day clock will begin and end for FCA's review and approval of the termination plan for submission to stockholders. The ICBA contended that the additional 30 days shifts the approval process from 60 to 90 days.

We disagree that the 30day time period is unnecessary. In our experience, it is likely that an institution will take longer than 30 days to assemble a complete plan of termination after a decision is made to terminate. The 30day waiting period will also encourage an institution to promptly inform us of its intention to terminate. The 30day time period gives FCA time to prepare for receipt and review of the request. FCA will still be obligated to review and take action on the proposed termination plan and disclosure for submission to stockholders within 60 days of the filing of a complete plan of termination or, if we take no action within 60 days, the institution can submit the plan of termination to its voting stockholders. We adopt Sec. 611.1221 as final without changes from the proposal.

Section 611.1223Plan of TerminationContents

We proposed numerous changes to this section including renaming this section ``Plan of terminationcontents.'' We proposed a requirement at Sec. 611.1223(b)(7) for a terminating institution to explain in the summary to the plan of termination whether the successor institution expects to engage in a corporate restructuring in the 18 months following termination.

We received comment letters from Rabobank and the ICBA on this section. Rabobank stated that the proposal does not explain why we would need this information or how we would use it, and that the requirement would inappropriately assert FCA oversight of a nonSystem entity. Rabobank further noted that if the terminating institution did not disclose a possible future restructuring, the successor institution may be discouraged from such a restructuring, despite potential benefits to equity holders, due to fear of interference from the FCA. Rabobank recommended that this requirement be eliminated. Rabobank stated that once an FCS institution has terminated its System charter and becomes a different type of financial institution, the institution is no longer regulated by FCA. The ICBA believed that this provision was without merit and should be deleted from the rule. The ICBA noted that an appropriate Federal or State authority charters the successor institution as a bank, savings and loan association, or other financial institution, so it is likely that this information will already be disclosed to voters. The commenters further stated that FCA is adding another legal roadblock, suggesting the successor institution could be sued after termination if an additional charter conversion was to occur.

We believe that this requirement benefits the equity holders who are entitled to know what the future plans of the terminating institution could include. If the terminating institution's conversion to another financial institution involves its acquisition by another financial services company or corporation, stockholders need to be fully informed before voting on the termination proposal. In addition, FCA could not interfere with the actions of the successor institution because the successor institution will not be subject to FCA oversight and regulation. Our principal concern is the right of stockholders to know if the successor institution, within the space of 18 months or less, will undergo further reorganization based on business planning underway at the time the termination application is filed with FCA. If the terminating institution has no such plans or is unaware of any future events that might result in its subsequent reorganization within the 18month period following termination, no such disclosure will be required. Consequently, we are not changing this provision of the rule and adopt it as proposed.

We also proposed in paragraph (c)(7) to require a terminating institution to include summaries or copies of terminationrelated contracts and agreements, including copies of contracts and agreements in connection with the termination and operations of the successor institution; in paragraph (c)(13) to require the institution to disclose employment, retirement, and severance agreements; in paragraph (c)(26) that we may require a terminating institution to disclose assessments, analyses, studies, or rulings that we require the institution to obtain under proposed Sec. 611.1211; in paragraph (c)(29) that we will require the terminating institution to include statements by directors that desire to make individual or group statements regarding the proposed termination and related transactions; and in paragraph (c)(3) that we would require the terminating institution to include a copy
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of the reaffirmation resolution, a proposed new requirement set forth in proposed Sec. 611.1235.

We did not receive any comments on these other provisions and adopt them, except for paragraph (c)(30), as final without changes. We have deleted paragraph (c)(30) in the final rule because the institution must send us the disclosure information before the board votes on the reaffirmation resolution.

Section 611.1230FCA Review and ApprovalPlan of Termination

Proposed new Sec. 611.1230 separated our approval of the plan of termination and the related disclosure to stockholders, as required by section 7.11(a)(1) of the Act, from our decision on the termination as required by section 7.10(a)(2) of the Act. We proposed to retain provisions on our section 7.11 approval in this section and to move the section 7.10 approval to proposed Sec. 611.1247. Our review of the disclosure information will precede the submission of the information to equity holders, as in the existing regulation, and we will begin the statutory review period on the date the disclosure information is complete, as determined by us. We proposed to review and approve or disapprove the termination itself after the equity holders have voted to approve the termination.

We received comments on this provision from all commenters. The FCC, three System banks, and four System associations stated they recognized the need for FCA to separate the approval of the termination plan, for purposes of distribution for a stockholder vote, from approval of the termination itself. At the same time, System commenters urged us to begin our substantive review as soon as possible after the application is received and to retain flexibility to make a decision as early as possible in the process so that the matter is not pending for a lengthy period. One bank noted that while improved information, analysis, and transparency are important objectives, FCA must be prepared to act when circumstances warrant, because failure to act could affect the System's investors and customers. One nonSystem commenter, the ABA, agreed that separating the review of the disclosure information from the review of the termination itself is appropriate. However, it expressed concern about FCA's ability to delay the process by requiring an unending level of information before the plan is deemed complete and argued that we should impose a reasonable cutoff point so that the institution can move forward. Rabobank stated that FCA's two approvals of the termination reduce clarity and impose costs and administrative burdens that outweigh the benefits. Rabobank believed that FCA burdens and encumbers the process to a degree that Congress explicitly did not intend and that we lack the authority to give ourselves intermediate approval steps. Rabobank also stated that requiring preliminary FCA review of the disclosure would delay the termination process without contributing a significant benefit to that process or to the stakeholders. One group of commercial bankers objected to this provision because it specifies no time limit for the conclusion of the process. Another group of commercial bankers argued that we create unnecessary barriers, legal impediments, time delays, and other obstacles for any FCS institution that may want to exit the System and that these obstacles are unparalleled in the financial services industry.

We agree with commenters that we should make a decision on the termination itself as early in the process as possible. Our separation of approval of the termination plan and disclosure for submission to stockholders from our approval (or disapproval) on the termination is not meant to delay unnecessarily the termination decision. We acknowledge that failure to act promptly and decisively may affect stockholders and investors' confidence. We will begin our substantive review as soon as possible and make a decision as early as possible. We disagree with other commenters that we are creating time delays and other obstacles by our process. We have always had the discretion, in our review and approval of other corporate applications (such as mergers and consolidations), to determine whether the application is complete before beginning the 60day review. We have used our discretion by communicating promptly with institutions whose applications were incomplete and working closely with them to ensure completion. We will follow this approach as well for a termination request in determining whether it is complete and in notifying the terminating institution when the 60day review period begins. In the alternative, FCA could reject a plan because it was incomplete, but the institution would need to begin the process anew. The proposal permits a more streamlined process. Once FCA notifies the institution that the termination plan and disclosure is complete, we are bound by the statutory requirement of section 7.11(a)(1) to act on the plan within 60 days. Should the FCA Board fail to act within the 60day period, the institution may submit the plan and related disclosure to its stockholders for a vote. Accordingly, we adopt this provision as proposed.

Section 611.1235Plan of TerminationDistribution

We proposed requiring the terminating institution's board of directors to adopt a reaffirmation resolution approving the termination not more than 14 days before mailing the plan to stockholders in order to ensure the continuing support of the board for the termination. Comments received on this provision and our response are included with the discussions of required board resolutions under Sec. 611.1210.

We also proposed to require the terminating institution to provide the plan of termination to equity holders at least 45 days (instead of the existing regulation's 30 days) before the stockholder vote will occur.

One nonSystem commenter, the ABA, disagreed with our extension for the stockholder review period from 30 days in the current rule to 45 days, arguing that it is a needless delay and that 30 days is sufficient for stockholders to review and question any termination plan.

On the contrary, stockholders will need to thoroughly review an expected extensive disclosure and may have a number of questions to ask the institution's board and management. The additional 15 days will permit informational meetings to be held throughout the institution's territory, as proposed in Sec. 611.1211(b), so that stockholders can have their questions answered and can discuss the pros and cons with other memberborrowers and with institution directors. These meetings will also give management an opportunity to explain the termination plan and procedures. We are finalizing this provision as proposed, except that we have made a nonsubstantive change to paragraph (a) to remove redundant language.
Section 611.1240Voting Record Date and Stockholder Approval

Except for existing Sec. 611.1240(c), which we proposed to move to Sec. 611.1235, we proposed to retain the remainder of existing Sec. 611.1240 with the following revisions. In paragraph (a), we proposed to require the stockholder vote to take place at least 60 days after we have approved the plan of termination (or 60 days after the end of our review period) instead of no more than 60 days after. We proposed this change to ensure that voters have
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enough time to review and evaluate the proposal. In paragraph (c), we proposed a quorum requirement of 30 percent of voting stockholders that must be present (in person or by proxy) at the meeting. This would not require 30 percent of voting stockholders to cast a vote but would require their presence (in person or by proxy) at the meeting. We made this proposal because we believe an issue of such importance to all equity holders should be deliberated upon by a significant number of the voting stockholders, regardless of the number who ultimately vote. In paragraph (d), we restated the requirement in section 7.10(a)(6) of the Act that a majority vote by voting stockholders present and voting in person or by proxy at a duly authorized meeting is needed to approve the termination.

We also proposed to add a reference in new paragraph (e) to Sec. 611.340, to clarify that the voting security regulation applies to this stockholder vote as well as Sec. 611.330, which covers confidentiality in voting.

We received comments on the proposed 30percent quorum requirement from a number of commenters. The System commenters supported the quorum requirement in this section for the first vote but not for the reconsideration vote in Sec. 611.1245, as discussed below. About half of the commercial bankers recommended a simpler, more convenient voting process, stating that, ``in the day of emails and the internet,'' we should not require 30 percent of stockholders to be physically present for the meeting. The ICBA, ICB of ND, and ABA also objected to requiring 30 percent of stockholders to be physically present during a termination vote because of the difficulty and cost to the stockholders, some of whom live in remote rural areas. In addition, the ABA asserted that requiring at least 60 days between FCA approval of the plan of termination and the stockholder vote caused an unnecessary delay in the termination process.

The proposed rule does not require voting stockholders to be physically present at the stockholders' meeting in order to meet the quorum. As the rule says, voting stockholders must be present ``in person or by proxy.'' Voting stockholders have the option of attending the meeting in person, giving their proxies to another voting stockholder of their choice who will attend the meeting in person, or sending their proxies to the institution with (or without) instructions as to how to vote. Moreover, a voting process that permits voting via the Internet is not prohibited, provided the institution complies with the voting security and confidentiality requirements of the Act and FCA regulations.

As for the 60day minimum period between FCA approval and the stockholder vote, we disagree that this will cause unnecessary delay in the termination process. We believe that at least 2 months are necessary for scheduling any prevote or ``information'' meetings for stockholders that we require or that the terminating institution wishes to hold, and for printing and distributing the disclosure information for stockholders.

We adopt this section in the final rule without any changes from the proposal.

Section 611.1245Stockholder Reconsideration

In paragraph (b) of this section, we proposed adding a quorum requirement of at least 30 percent of voting stockholders for the same reasons we proposed a quorum requirement for the first stockholder vote. The stockholder reconsideration vote is provided for in section 7.9 of the Act (12 U.S.C. 2279c2), which gives stockholders opposing an intraSystem merger, transfer of lending authority, or termination the right to petition their institution for a revote (reconsideration vote) following any approval of the transaction. The petition must be signed by at least 15 percent of the voting stockholders and must be delivered to the FCA within 35 days after the mailing of the notice to stockholders of the results of the first vote. If a majority of the voting stockholders votes against the transaction in the

reconsideration vote, the transaction cannot take place.

All of the System commenters objected to having a 30percent quorum requirement for the reconsideration vote, even though they supported the 30percent quorum requirement for the first vote. They asserted that it was unduly burdensome and contrary to the Act. They did not specify how they believed it was contrary to the Act, but they said that the quorum requirement could create an incentive for stockholders supporting termination to boycott the reconsideration vote meeting. NonSystem commenters opposed what they believed was a requirement that stockholders be physically present to count towards the quorum for the reconsideration vote; as we explain above, this interpretation is incorrect, and there is no requirement for stockholders to be physically present to make up the quorum for either vote.

We have considered the recommendation to eliminate the quorum requirement for the reconsideration vote and have decided to retain it. The quorum requirements for the reconsideration vote, as well as for the first stockholder vote, are consistent with our authorities under the Act to regulate the termination process. If we were to incorporate the System commenters' recommendation, it would be more difficult for the terminating institution to obtain the first vote than for stockholders to obtain a reconsideration vote. Furthermore, without the same quorum requirement for the reconsideration vote, there would be a possibility that a termination could be blocked by a significantly smaller number of stockholders in a reconsideration vote than the number of stockholders who originally voted in favor of it. We believe this result would be unfair. Under our proposal, it will be no more difficult to achieve a quorum for the reconsideration vote than for the first vote.

We adopt this section in the final rule without any changes from the proposal.
Section 611.1246Filing of Termination Application and Its Contents

Proposed new Sec. 611.1246 provides that, within 90 days of notifying us that voting stockholders have approved the plan of termination, a terminating institution may submit a termination application containing the information that is required by the termination regulations and any additional information that we request or that the terminating institution's board wishes to submit.

We received no comments that directly relate to the filing of the termination application with FCA following the stockholder vote. We adopt the provision as proposed.

Section 611.1247FCA Review and ApprovalTermination

We proposed new Sec. 611.1247 that would provide for a separate approval of the termination application. As we noted above in the preamble discussion of Sec. 611.1230, we proposed to review the termination application after our review of the plan of termination required by section 7.11(a)(1) of the Act and after a stockholder vote approving the termination. In this proposed new section, paragraph (a) stated that, after we receive the termination application, we will review it and either approve or disapprove the termination. Paragraph (b) stated that we will disapprove the termination if we determine that there are one or more appropriate reasons for disapproval, consistent with our statutory and regulatory authorities. We proposed to delete existing Sec. 611.1230(b), which provides that we
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may disapprove a termination if we determine it would have a ``material adverse effect on the ability of the remaining System institutions to fulfill their statutory purpose.'' While we did not rule out disapproval of a termination based on its ``material adverse effect'' on the remaining System institutions, we stated that we may disapprove a termination for any appropriate reason.

Proposed paragraph (c) set forth conditions required for our approval of the termination. In proposed paragraph (d), we provided that, when we approve a termination, we will also determine an effective date for the termination. Such date could be no earlier than the last to occur of the following events: (1) Fulfillment of the conditions in paragraph (c) of this section; (2) the terminating institution's proposed termination date; (3) 90 days after we received the termination application; or (4) 15 days after any reconsideration vote.

We received 33 comment letters on this provision of the proposed rule. In their comments on proposed Sec. 611.1230, eight System commenters urged FCA to begin our substantive review as soon as possible after the application is received and to retain flexibility to make a decision as early as possible in the process so the matter is not pending for a lengthy period. One System bank noted that while improved information, analysis, and transparency are important objectives, FCA must be prepared to act when circumstances warrant, because failure to act could affect the System's investors and customers. In our response above to the comments on Sec. 611.1230, we agreed on the importance of decisive action as early as possible. One System bank commented that we should approve a termination only if the institution's exit further fulfills the congressionally mandated mission and, at a minimum, any approval of a request should not be detrimental to the remaining institutions' ability to fulfill the mission. Rabobank stated that FCA's second vote, which would follow stockholder approval and three votes by the board of directors, is unfair to stockholders because it would veto the equity holders' mandate and undercut the democratic principles that give the stockholderowners the right to make decisions governing their institution. Rabobank commented that our failure to impose a timeframe for FCA's vote could delay the process indefinitely. Rabobank also objected to our removal of all references to criteria that we may use or reasons we may give for disapproval, giving System institutions no way to ascertain whether a termination will be approved until an extraordinary amount of time and money has been expended. In particular, Rabobank objected to our removal of the criterion of ``material adverse effect'' from the regulation that governs our review, and argued that it is the only reason for disapproving a termination request, assuming all regulations were satisfied. It asked that this criterion be preserved from the current rule and that FCA clarify that we will disapprove a termination only based on a determination that the termination would have a material adverse effect. In the alternative, Rabobank asked FCA to identify additional criteria for disapproval and then republish its proposed rule with criteria for public comment. Rabobank stated that FCA owes System institutions greater transparency in how it will evaluate termination requests and recommended that we articulate clear standards for how we would review the request and make the decision after board and stockholder approval. The ICBA commented that the ``material adverse effect'' criterion should stay in the regulation as it is the one that makes the most sense in directing our approval process, and that all other issues, such as impact on stockholders, would have already been thoroughly vetted during the disclosure review process. The ICBA further noted that the payment of the exit fee and debt obligations will already ensure there is not an adverse effect on System institutions. The ABA noted that FCA retains the right to deny a termination if it has a materially adverse impact on the rest of the System even though the proposed rule eliminated this as a specified reason for denial. Also, the ABA expressed concern that ``materially adverse effect'' is not quantified in the proposed rule and suggested that FCA set forth a rule for public comment on the level of impact that we would consider material. In addition, the ABA criticized us for setting no time limit for approval or disapproval and establishing no criteria by which we would make the decision, noting that the grounds for rejection, if already approved by the stockholder owners, should be extremely restricted because we have numerous options for maintaining FCS services in the territory. The ABA recommended that FCA set out its potential reasons for rejection of a termination for notice and public comment. One group of commercial bankers commented that FCA may reject any termination plan even after the local institution has followed all procedures. It noted that FCA, as the System's regulator and surety of stockholder rights, should clearly spell out in advance the basis and timeframes for any such determination (of approval or disapproval). A second group of commercial bankers stated that the proposal should set clear deadlines for various stages of the approval process but that the proposal leaves many of the decision deadlines openended.

We believe that the System bank's suggestion that we should approve a termination only if the exit furthers fulfillment of the System's mission or, at minimum, approve a termination only if it is not detrimental to the remaining System institutions' ability to fulfill the mission is too narrow a reading of our statutory authority. The Act provides FCA with discretion to approve or disapprove a termination application and does not restrict our reasons for disapproving a proposed termination. With respect to our decision on the termination, FCA has statutory authority to approve or disapprove the termination, whether before or after a stockholder vote. Therefore, FCA disapproval would not be a ``veto'' of a stockholders' ``mandate,'' but would be an exercise of FCA's approval authority. In making our decision, we will consider all relevant factors, including stockholder actions on the termination proposal.

As explained in the preamble to the proposed rule, we have determined that a clear separation of the two approvals will ensure the proper level of scrutiny as to the merits of the proposal apart from the adequacy of the disclosure materials. Termination of System status raises numerous issues for the terminating institution's stockholders, the affiliated funding bank or remaining affiliated associations (as applicable), investors, and the public, all of whom must be considered. Three nonSystem commenters (Rabobank, ICBA, ABA) stated their belief that the only basis for our denial is if the termination has a material adverse effect on the ability of the remaining System institutions to fulfill their statutory purpose. Their intense focus on this one criterion supports our rationale for deleting this language from the rule because it diverts attention from any other reason(s) that we may need to consider. We may still decide that a termination should be denied based on the material adverse effect that it has on the rema

FOR FURTHER INFORMATION CONTACT Thomas Dalton, Senior Staff Accountant, Office of Regulatory Policy, Farm Credit Administration, McLean, VA 221025090, (703) 8834414; TTY (703) 8834434; or Rebecca S. Orlich, Senior Counsel, Office of General Counsel, Farm Credit Administration, McLean, VA 221025090, (703) 8834020, TTY (703) 883 4020.