[Federal Register: July 16, 2004 (Volume 69, Number 136)]
[Proposed Rules]
[Page 42606-42612]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16jy04-11]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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[[Page 42606]]
FARM CREDIT SYSTEM INSURANCE CORPORATION
12 CFR Part 1412
RIN 3055-AA08
Golden Parachute and Indemnification Payments
AGENCY: Farm Credit System Insurance Corporation (FCSIC or
Corporation).
ACTION: Proposed rule.
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SUMMARY: The FCSIC is issuing a proposed rule limiting golden parachute
and indemnification payments to institution-related parties (IRPs) by
Farm Credit System institutions, including their subsidiaries, service
corporations and affiliates. The purpose of the rule is to prevent
abuses in golden parachute and indemnity payments and to protect the
assets of the institution and the Farm Credit System Insurance Fund.
DATES: Comments must be received by October 14, 2004.
ADDRESSES: You may send comments by electronic mail through the
``News'' section of FCSIC's Web site, http://www.fcsic.gov, or through the
Governmentwide ``http://www.regulations.gov'' portal. You may also send
comments to Dorothy L. Nichols, General Counsel at
``nicholsd@fcsic.gov'' or by mail at the address listed below. Copies
of all comments we receive, may be reviewed in our office in McLean,
Virginia.
FOR FURTHER INFORMATION CONTACT: Dorothy L. Nichols, General Counsel,
Farm Credit System Insurance Corporation, 1501 Farm Credit Drive,
McLean, VA, 22102, 703-883-4211, TTY 703-883-4390, Fax 703-790-9088.
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
No collection of information pursuant to section 3504(h) of the
Paperwork Reduction Act (44 U.S.C. 3501 et seq.) is contained in the
proposed rule. Consequently, no information was submitted to the Office
of Management and Budget for review.
Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act (Pub.
L. 96-354, 5 U.S.C. 601 et seq.), it is certified that the proposed
rule will not have significant impact on a substantial number of small
entities.
Background
Section 218 of the Farm Credit System Reform Act of 1996 (``Reform
Act'') amended the Farm Credit Act of 1971 by adding a new section
5.61B. See Public Law 104-105, Feb. 10, 1996. This section authorizes
the Corporation to prohibit or limit, by regulation or order, golden
parachute and indemnification payments. See 12 U.S.C. 2277a-10b.
Section 5.61B is similar to legislative authorities given to the other
Federal financial institution regulators. See e.g. 12 U.S.C. 1828(k).
The terms golden parachute and indemnification payment are defined
in the statute at 12 U.S.C. 2277a-10b(a)(1) and (2). In general, golden
parachutes are employment contracts that offer substantial payments
when employment is terminated. Indemnification payments are often used
to reimburse officers or directors for personal losses due to judgments
or litigation costs incurred while exercising official duties. The
golden parachute portion of the proposed rule applies to any Farm
Credit System institution seeking to make golden parachute payments
only when the institution is in a ``troubled condition.'' The
indemnification part of the proposed rule applies to Farm Credit System
institutions regardless of their financial condition. Its primary
purpose is to prohibit reimbursements that benefit wrongdoers. For
example, an institution could not indemnify officers or directors for
legal expenses or liabilities that result from a successful Farm Credit
Administration (FCA) administrative action. However, if the officer or
director is cleared of the charges, legal fees and costs can be
reimbursed.
Golden Parachute Prohibition
The regulation follows the statutory definition of a golden
parachute payment. It is a payment (or an agreement to make a payment)
that:
Is in the nature of compensation by any System institution
for the benefit of any current or former institution-related party;
Is based on an obligation that is contingent on
termination; and
Is received on or after, or is made in contemplation of
certain events that signify the System institution is in a troubled
condition.
Following the criteria set out in section 5.61B(a)(1) of the Reform
Act, the proposed rule prohibits golden parachute payments by
institutions that are insolvent, in conservatorship or receivership, or
rated a ``4'' or ``5'' in the FCA Financial Institution Rating System.
Section 5.61B(a)(1)(A) also authorizes the Corporation to define by
regulation other circumstances that warrant a determination that an
institution is in a troubled condition.
The proposed rule defines troubled condition to include any
institution: (1) Subject to a cease-and-desist order or written
agreement issued by the FCA requiring it to improve its financial
condition; (2) subject to an FCA proceeding that may result in an order
that requires improvement in financial condition; or (3) informed in
writing by the Corporation that it is in troubled condition based on
its most recent report of examination or other pertinent information.
For banks, troubled condition also includes a bank that is: (1) Unable
to make timely payments of principal and interest on bank-insured
obligations; or (2) receiving assistance from the Insurance Fund. For
the Federal Agricultural Mortgage Corporation (``Farmer Mac''),
troubled condition also includes inability to make timely payments of
principal and interest on its debt obligations or an inability to
fulfill its guarantee obligations. The definition of troubled condition
in the proposed rule is similar to the definition in rules adopted by
the other Federal financial institution regulators. See e.g., 12 CFR
359.1(f); 12 CFR 563.555 and 12 CFR 701.14.
Exceptions
The proposed rule lists eight exceptions to the prohibition on
golden parachute payments in Sec. 1412.2(f)(2). Four of these are
listed in the statute: ERISA \1\ qualified retirement plans;
nonqualified ``bona fide'' deferred or supplemental compensation plans;
other nondiscriminatory benefit plans;
[[Page 42607]]
and payments made by reason of death or disability. See 12 U.S.C.
2277a-10b(a)(1)(c).
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\1\ Employee Retirement Income Security Act of 1974, as amended.
(29 U.S.C. 1002(1)).
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Nondiscriminatory means a plan or arrangement that applies to all
employees who meet customary eligibility requirements such as minimum
length-of-service standards. We understand that many severance plans
pay somewhat more generous benefits to higher ranking employees. The
proposed rule would allow a modest disparity in nondiscriminatory
severance benefits linked to objective criteria like job title or
length of service. The proposed definition of nondiscriminatory
specifies a maximum 20 percent in any one criteria, unless a request
for a larger amount is granted by the Corporation. For example, if
lower-level employees are provided 50 percent of their yearly salary
and 1 week of salary for each year of service, higher level employees
could receive 60 percent of their yearly salary plus 1 week of salary
for each year of service. Our hope is that this permitted modest
discrepancy would allow System institutions to offer severance benefits
that conform to industry norms for nondiscriminatory benefit plans. The
statute grants the Corporation authority to determine other permissible
arrangements and four of the eight exceptions in Sec. 1412.2(f)(2) are
exceptions added by the Board for System institutions. They include
payments required by state or foreign law and a safe harbor provision.
Section 1412.2(f)(2)(viii) adds an exception that can be used in
lieu of paragraph (f)(2)(vii) for severance pay plans or arrangements
that do not meet the regulatory definition of nondiscriminatory. We
understand that at times different benefit arrangements may be made
available to different employees. For example, an institution that is
experiencing financial trouble may want to terminate some employees
immediately while providing incentive payments to employees with
critical functions so as to delay their departures. The proposed rule
limits payments or arrangements under this exception to 12-months' base
salary, unless a request for a larger payment is granted by the
Corporation. Minor deviations in severance benefits that involve
tangible property would also be permitted. For example, an institution
may want to give some departing employees their laptops but other
employees would get no additional benefits. We would not treat this as
a prohibited golden parachute payment, as long as the cost is
reasonable and the practice customary. We hope this provision provides
a workable safe harbor for institutions that want to reward more highly
compensated employees that have greater responsibilities without
undermining the intent of the legislation.
Section 1412.5(a)(2) permits a troubled institution to hire a
``white knight'', an individual hired to improve the institution's
condition, and agree to pay a golden parachute payment upon termination
of employment, provided the institution obtains the prior written
consent of the FCA and the Corporation. Such an agreement has the
potential to benefit the institution and the Insurance Fund. We
recognize that individuals who possess the experience and expertise
necessary to reverse a troubled institution may not take the job unless
they receive an agreement for a severance payment reflecting market
rates, in the event that their efforts are not successful.
Section 1412.5(a)(3) contains an exception for a change in control.
System institutions may pay up to 12-month's salary in the event of a
change of control with the prior consent of the FCA. The Board believes
1-year's salary should be a sufficient incentive for a senior executive
to objectively consider a merger that may result in the loss of that
executive's job at a troubled institution.
Finally, the proposed rule in Sec. 1412.5(a)(1) sets out a
procedure to allow System institutions to request authority for what
would otherwise be a prohibited golden parachute payment. This
provision recognizes that there may be valid business reasons to seek
an agreement not covered by any of the express exceptions, which the
institution believes should not be prohibited. If an institution seeks
such an authorization, the statute sets out a number of factors that
the FCA and the Corporation may consider. See 12 U.S.C. 2277a-10b(c).
The proposed rule at Sec. 1412.5(a)(4) and (b) enumerates the factors
that the FCA and the Corporation will consider, including whether the
IRP committed any fraudulent acts, breached a fiduciary duty or played
a substantial role in the institution's troubled condition. Under the
proposed rule, the institution making the request should address the
factors specified in the rule so that the FCA and the Corporation can
consider whether the requested payment would be contrary to the intent
of the prohibition. The institution should include any information of
which it has knowledge that indicates there is a reasonable basis to
believe that the IRP satisfies any of the criteria set out in Sec.
1412.5(a)(4) and (b). If the applicant is not aware of any such
information, it shall certify that it is not.
Indemnification Payments
The statute prohibits Farm Credit System institutions from making
an indemnification payment for any liability or legal expense arising
from an administrative or civil action brought by FCA that results in a
civil money penalty, removal from office or a prohibition on
participation in the System institution's business. See 12 U.S.C.
2277a-10b(a)(2). Institutions may purchase directors and officers
insurance to cover the legal expenses even if the individual loses the
legal action and pays settlement costs. See 12 U.S.C. 2277a-10b(e)(l).
Nevertheless, the institution cannot use directors and officers
insurance to pay the civil money penalty.
The proposed rule, at Sec. 1412.2(l), follows the definition of a
prohibited indemnification payment set out in the statute. It includes
any payment or agreement to pay an institution-related party for any
civil money penalty or judgment resulting from an administrative or
civil action brought by FCA where the person must pay a civil money
penalty, is removed from office or is subject to a cease and desist
action. There are two exceptions in the proposed rule. The first allows
System institutions to purchase commercial insurance to cover expenses
other than judgments and penalties. Second, the proposed rule permits a
partial indemnification. If there has been a finding that clears the
individual, indemnification is permitted for the legal or professional
expenses attributable to these charges. In addition, Sec. 1412.6 sets
out criteria for permissible ``up front'' indemnification payments. The
System institution's board of directors must determine that the party
requesting indemnification acted in good faith. Also, the payment
cannot materially adversely affect the institution's safety and
soundness. Finally, the party must agree to reimburse the institution
for advanced indemnification payments if they become prohibited
payments later, due to an unfavorable ruling.
Farm Credit System Institutions
The prohibitions in 12 U.S.C. 2277a-10b apply to all Farm Credit
System institutions. The proposed rule at Sec. 1412.2(b) defines Farm
Credit System institutions to include all associations, banks, service
corporations and their subsidiaries and affiliates, except the Farm
Credit Financial Assistance Corporation. It also includes Farmer Mac
and its subsidiaries and affiliates,
[[Page 42608]]
which is described in 12 U.S.C. 2279aa-1(a)(2) as an institution of the
Farm Credit System. Furthermore, 12 U.S.C. 2277a-10b(b) specifies that
the prohibition on golden parachute and indemnity payments was meant to
include all Farm Credit System institutions, including even a
conservatorship or receivership of Farmer Mac. The legislative history
of the Reform Act makes this point clear. It states: ``New subsection
(a) provides that FCSIC has authority to prohibit or limit golden
parachutes or indemnifications, including the Federal Agricultural
Mortgage Corporation (Farmer Mac).'' H.R. Rep. 104-421, 104th Cong.,
1st Sess. 12 (1995).
Institution-Related Party
The proposed rule prohibits certain golden parachute and
indemnification payments made to or for an institution-related party.
The term institution-related party (IRP) is defined in the statute at
12 U.S.C. 2277a-10b(a)(3). It includes directors, officers, employees
or agents for a Farm Credit System institution, stockholders (other
than another Farm Credit System institution), consultants, joint
venture partners and any one else who FCA determines has participated
in the affairs of the institution. Additionally, IRPs include
independent contractors, including attorneys, appraisers or
accountants, that knowingly or recklessly participate in an unsafe or
unsound practice that caused or is likely to cause harm to the
institution. We will examine very closely any attempt by a Farm Credit
System institution to avoid the regulation by employing the IRP in some
other capacity (e.g., a consultant) and calling the arrangement
consulting compensation rather than a severance payment or golden
parachute.
Receivership Issues
Section 1412.8 explains that this regulation is not meant to bind
any receiver of a failed Farm Credit System institution. The fact that
FCSIC or FCA consents to a particular payment does not mean that the
approving entity or the receiver will be responsible for making the
payments in the event of a receivership or that the recipient will
receive some sort of preference over other creditors from the
receivership.
Enforcement
The statute at 12 U.S.C. 2277a-10b(b) grants the FCSIC authority to
prohibit golden parachute and indemnity payments by regulation or
order. The Board believes that a regulation proscribing limits,
defining ``troubled condition'' and setting out procedures for seeking
approval of a payment that is not specified in one of the exceptions is
usually preferable to a case-by-case approach. Nevertheless, FCSIC
could deal with abuses on a case-by-case basis through an enforcement
proceeding.
The proposed regulation is similar to the regulations of the other
Federal financial regulators with similar statutory authority. See,
e.g., 12 CFR part 359. Rather than prohibit all the golden parachute
payments above a certain threshold, the proposed regulation allows a
Farm Credit System institution that is in a troubled condition, as
defined in the regulation, to seek approval for an otherwise prohibited
golden parachute payment to an IRP. Similarly, the proposal rule on
indemnity payments seeks a rational and fair approach for determining
indemnification in order to avoid abuses.
The statute at 12 U.S.C. 2277a-10b(c) provides that FCSIC ``shall
prescribe, by regulation, the factors to be considered by the
Corporation in taking any action under subsection (b) [its authority to
prohibit or limit golden parachute payments and indemnity payments].
The section also sets out a number of illustrative factors that may be
considered when taking action under subsection (b): For Example,
whether an IRP has committed acts of fraud, breach of fiduciary duty,
or insider abuse that has had a detrimental effect on the financial
condition of the institution; whether there is a reasonable basis to
believe that the IRP has violated the law or regulations; whether the
IRP was in a position of managerial or fiduciary responsibility; and
the length of time the party was related to the institution and the
reasonableness of the compensation. In addition, section 2277a-10b(d)
specifies that certain payments are prohibited. No Farm Credit System
institution may prepay the salary or any liability or legal expense of
any IRP if the payment is made in contemplation of insolvency or such
payment has the result of preferring one creditor over another.
The Corporation has considered the prohibited payments and the
illustrative factors in preparing its proposed regulation. It has also
reviewed the legislative history of the Reform Act and the
Comprehensive Thrift and Bank Fraud Prosecution and Taxpayer Recovery
Act of 1990 (the Fraud Act), which added similar authority for the
Federal Deposit Insurance Corporation in a new section 18(k)(1) to the
Federal Deposit Insurance Act. Public Law. 101-647, Sec. 2523 (1990).
The Corporation is aware that the Federal financial regulators have
encountered abuses with golden parachutes when institutions pay
substantial sums to top executives who resign after an institution is
troubled or immediately before the institution is sold. Ultimately, the
Corporation has concluded that to avoid such abuses golden parachute
payments should be prohibited for Farm Credit System institutions that
are in a troubled condition, as defined in the regulation, except under
the circumstances set forth in the proposed rule. If an institution in
a troubled condition or an IRP wants to make a payment or enter into an
agreement that it believes should not be prohibited and the payment or
agreement is not covered by one of the exceptions specified in the
regulation, it may seek approval from FCA and FCSIC. When it does, the
regulation requires the institution or IRP to address some of the
factors listed in the statute so that the FCA and FCSIC can consider
them in determining whether the proposed payment or agreement should be
allowed, limited or prohibited. The Corporation believes this rule will
best protect the financial integrity of the institution and safeguard
its assets as Congress intended.
In issuing the proposed indemnification rule, the Corporation has
considered the prohibited payments and the illustrative factors set out
in the statute as well as the legislative history. The Corporation
believes that individuals that violate the law or regulations should
pay penalties out of their own pockets and not be reimbursed by a Farm
Credit System institution. The Corporation believes that this proposed
regulation on indemnification payments preserves the deterrent effects
of administrative enforcements and civil actions even though it does
not prohibit all indemnification payments.
As noted, the proposal sets forth circumstances under which
indemnification payments may be made. For example, the Corporation has
decided to allow indemnification ``up front'' for an IRP's legal or
other professional expenses if: (1) Its board of directors determines
that the party requesting indemnification acted in good faith, (2) the
payment will not materially adversely affect the institution, and (3)
the person agrees in writing to reimburse the institution if the
alleged violations of law, regulation or fiduciary duty are upheld. If
these criteria are met, the institution's board of directors will have
concluded in good faith that the party requesting indemnification did
not commit a fraudulent act, insider abuse or some other actionable
offense that had a material adverse effect on the financial
[[Page 42609]]
condition of the institution. Consideration of these factors in this
regulatory requirement is what Congress intended FCSIC to do in taking
action under section 5.61B(b) and (c) (12 U.S.C. 2277a-10b(b) and (c)).
Also, the Corporation has decided to permit partial indemnification for
that portion of the liability or legal expenses incurred where there is
a determination on part of the charges in favor of the IRP. Finally, an
institution may purchase insurance to cover expenses other than
judgments or penalties.
FCSIC's authority to regulate golden parachutes and indemnity
payments is in addition to FCA's safety and soundness enforcement
authority pursuant to the Farm Credit Act of 1971, as amended.
Furthermore, nothing in this regulation limits the powers, functions,
or responsibilities of the FCA.
List of Subjects in 12 CFR Part 1412
Banks, banking, Golden parachute payment, Indemnification payment,
Institution-related party, Penalties, Prohibitions.
For the reasons set out in the preamble, 12 CFR part 1412 is
proposed to be added as set forth below.
PART 1412--GOLDEN PARACHUTE AND INDEMNIFICATION PAYMENTS
Sec.
1412.1 Scope.
1412.2 Definitions.
1412.3 Golden parachute payments prohibited.
1412.4 Prohibited indemnification payments.
1412.5 Permissible golden parachute payments.
1412.6 Permissible indemnification payments.
1412.7 Filing instructions.
1412.8 Applicable in the event of receivership.
Authority: 12 U.S.C. 2277a-10b.
Sec. 1412.1 Scope.
(a) This regulation limits and/or prohibits, in certain
circumstances, the ability of Farm Credit System (System) institutions,
their service corporations, subsidiaries and affiliates from making
golden parachute and indemnification payments to institution-related
parties (IRPs).
(b) This regulation applies to System institutions in a troubled
condition that seek to make golden parachute payments to their IRPs.
(c) The limitations on indemnification payments apply to all System
institutions, their service corporations, subsidiaries and affiliates
regardless of their financial health.
Sec. 1412.2 Definitions.
(a) Act or Farm Credit Act means Farm Credit Act of 1971 (12 U.S.C.
2002(a)), as amended by the Farm Credit System Reform Act of 1996,
amending 12 U.S.C. 2277a-10.
(b) Farm Credit System institution or System institution means any
``institution'' enumerated in section 1.2 of the Act including, but not
limited to, associations, banks, service corporations, the Federal Farm
Credit Banks Funding Corporation, the Farm Credit Leasing Services
Corporation and their subsidiaries and affiliates, as well as, the
Federal Agricultural Mortgage Corporation and its subsidiaries and
affiliates, as described in 12 U.S.C. 2279aa-1(a).
(c) Benefit plan means any plan, contract, agreement or other
arrangement which is an ``employee welfare benefit plan'' as that term
is defined in section 3(1) of the Employee Retirement Income Security
Act of 1974, as amended (29 U.S.C. 1002(1)), or other usual and
customary plans such as dependent care, tuition reimbursement, group
legal services or other benefits provided under a cafeteria plan
sponsored by the System institution; provided however, that such term
shall not include any plan intended to be subject to paragraph
(f)(2)(iii), (vii) and (viii) of this section.
(d) Bona fide deferred compensation plan or arrangement means any
plan, contract, agreement or other arrangement whereby:
(1) An IRP voluntarily elects to defer all or a portion of the
reasonable compensation, wages or fees paid for services rendered which
otherwise would have been paid to such party at the time the services
were rendered (including a plan that provides for the crediting of a
reasonable investment return on such elective deferrals) and the System
institution either:
(i) Recognizes compensation expense and accrues a liability for the
benefit payments according to generally accepted accounting principles
(GAAP); or
(ii) Segregates or otherwise sets aside assets in a trust which may
only be used to pay plan and other benefits, except that the assets of
such trust may be available to satisfy claims of the System
institution's creditors in the case of insolvency; or
(2) The System institution establishes a nonqualified deferred
compensation or supplemental retirement plan, other than an elective
deferral plan described in paragraph (d)(1) of this section:
(i) Primarily for the purpose of providing benefits for certain
IRPs in excess of the limitations on contributions and benefits imposed
by sections 415, 401(a)(17), 402(g) or any other applicable provision
of the Internal Revenue Code of 1986 (26 U.S.C. 415, 401(a)(17),
402(g)); or
(ii) Primarily for the purpose of providing supplemental retirement
benefits or other deferred compensation for a select group of
directors, management or highly compensated employees (excluding
severance payments described in paragraph (f)(2)(v) of this section and
permissible golden parachute payments described in Sec. 1412.5); and
(3) In the case of any nonqualified deferred compensation or
supplemental retirement plans as described in paragraphs (d)(1) and (2)
of this section, the following requirements shall apply:
(i) The plan was in effect at least 1 year prior to any of the
events described in paragraph (f)(1)(ii) of this section;
(ii) Any payment made pursuant to such plan is made in accordance
with the terms of the plan as in effect no later than 1 year prior to
any of the events described in paragraph (f)(1)(ii) of this section and
in accordance with any amendments to such plan during such 1 year
period that do not increase the benefits payable thereunder;
(iii) The IRP has a vested right, as defined under the applicable
plan document, at the time of termination of employment to payments
under such plan;
(iv) Benefits under such plan are accrued each period only for
current or prior service rendered to the employer (except that an
allowance may be made for service with a predecessor employer);
(v) Any payment made pursuant to such plan is not based on any
discretionary acceleration of vesting or accrual of benefits which
occurs at any time later than 1 year prior to any of the events
described in paragraph (f)(1)(ii) of this section;
(vi) The System institution has previously recognized compensation
expense and accrued a liability for the benefit payments according to
GAAP or segregated or otherwise set aside assets in a trust which may
only be used to pay plan benefits, except that the assets of such trust
may be available to satisfy claims of the System institution's
creditors in the case of insolvency; and
(vii) Payments pursuant to such plans shall not be in excess of the
accrued liability computed in accordance with GAAP.
(e) Corporation or FCSIC mean the Farm Credit System Insurance
Corporation, in its corporate capacity.
(f) Golden parachute payment. (1) The term ``golden parachute
payment''
[[Page 42610]]
means any payment (or any agreement to make any payment) in the nature
of compensation by any System institution for the benefit of any
current or former IRP pursuant to an obligation of such System
institution that:
(i) Is contingent on the termination of such party's primary
employment or relationship with the System institution; and
(ii) Is received on or after, or is made in contemplation of, any
of the following events:
(A) The insolvency (or similar event) of the System institution
which is making the payment or bankruptcy or insolvency (or similar
event) of the service corporation, subsidiary or affiliate which is
making the payment; or
(B) The System institution is assigned a composite rating of 4 or 5
by the FCA; or
(C) The appointment of any conservator or receiver for such System
institution; or
(D) A determination by the Corporation, that the System institution
is in a troubled condition, as defined in paragraph (m) of this
section; and
(iii) Is payable to an IRP whose employment by or relationship with
a System institution is terminated at a time when the System
institution by which the IRP is employed or related satisfies any of
the conditions enumerated in paragraphs (f)(1)(ii)(A) through (D) of
this section, or in contemplation of any of these conditions.
(2) Exceptions. The term ``golden parachute payment'' shall not
include:
(i) Any payment made pursuant to a pension or retirement plan which
is qualified (or is intended within a reasonable period of time to be
qualified) under section 401 of the Internal Revenue Code of 1986 (26
U.S.C. 401); or
(ii) Any payment made pursuant to a benefit plan as that term is
defined in paragraph (c) of this section; or
(iii) Any payment made pursuant to a ``bona fide'' deferred
compensation plan or arrangement as defined in paragraph (d) of this
section; or
(iv) Any payment made by reason of death or by reason of
termination caused by the disability of IRP; or
(v) Any severance or similar payment which is required to be made
pursuant to a state statute or foreign law which is applicable to all
employers within the appropriate jurisdiction (with the exception of
employers that may be exempt due to their small number of employees or
other similar criteria); or
(vi) Any other payment which the Corporation determines to be
permissible in accordance with Sec. 1412.6, on permissible
indemnification payments; or
(vii) Any payment made pursuant to a nondiscriminatory severance
pay plan or arrangement that provides for payment of severance benefits
to all eligible employees upon involuntary termination other than for
cause, voluntary resignation, or early retirement. Furthermore, such
severance pay plan or arrangement shall not have been adopted or
modified to increase the amount or scope of severance benefits at a
time when the System institution was in a condition specified in
paragraph (f)(1)(ii) of this section or in contemplation of such a
condition without the prior written consent of the FCA; or in lieu of a
payment made pursuant to this paragraph;
(viii) Any payment made pursuant to a severance pay plan or
arrangement that provides severance benefits upon involuntary
termination other than for cause, voluntary resignation, or early
retirement. No employee shall receive any payment under this subpart
which exceeds the base compensation paid to such employee during the 12
months (or longer period or greater benefit as the Corporation shall
consent to) immediately proceeding termination of employment.
Furthermore, such severance pay plan or arrangement shall not have been
adopted or modified to increase the amount or the scope of the
severance benefits at a time when the System institution was in a
condition specified in paragraph (f)(1)(ii) of this section or in
contemplation of such a condition without the written approval of the
FCA.
(g) The FCA means the Farm Credit Administration.
(h) Institution-related party (IRP) means:
(1) Any director, officer, employee, or controlling stockholder
(other than another Farm Credit System institution) of, or agent for a
System institution;
(2) Any stockholder (other than another Farm Credit System
institution), consultant, joint venture partner, and any other person
as determined by the FCA (by regulation or case-by-case) who
participates in the conduct of the affairs of a System institution; and
(3) Any independent contractor (including any attorney, appraiser,
or accountant) who knowingly or recklessly participates in any
violation of any law or regulation, any breach of fiduciary duty, or
any unsafe or unsound practice, which caused or is likely to cause more
than a minimal financial loss to, or a significant adverse effect on,
the System institution.
(i) Liability or legal expense means:
(1) Any legal or other professional fees and expenses incurred in
connection with any claim, proceeding, or action;
(2) The amount of, and any cost incurred in connection with, any
settlement of any claim, proceeding, or actions; and
(3) The amount of, any cost incurred in connection with, any
judgment or penalty imposed with respect to any claim, processing, or
action.
(j) Nondiscriminatory means that the plan, contract or arrangement
in question applies to all employees of a System institution who meet
reasonable and customary eligibility requirements applicable to all
employees, such as minimum length of service requirements. A
nondiscriminatory plan, contract or arrangement may provide different
benefits based only on objective criteria such as salary, total
compensation, length of service, job grade or classification, which are
applied on a proportionate basis, with a modest disparity in severance
benefits relating to any one criterion of 20 percent.
(k) Payment means:
(1) Any direct or indirect transfer of any funds or any asset;
(2) Any forgiveness of any debt or other obligation;
(3) The conferring of benefits in the nature of compensation,
including but not limited to stock options and stock appreciation
rights; or
(4) Any segregation of any funds or assets, the establishment or
funding of any trust or the purchase of or arrangement for any letter
of credit or other instrument, for the purpose of making, or pursuant
to any agreement to make, any payment on or after the date on which
such funds or assets are segregated, or at the time of or after such
trust is established or letter of credit or other instrument is made
available, without regard to whether the obligation to make such
payment is contingent on:
(i) The determination, after such date, of the liability for the
payment of such amount; or
(ii) The liquidation, after such date, of the amount of such
payment.
(l) Prohibited indemnification payment. (1) The term ``prohibited
indemnification payment'' means any payment (or any agreement or
arrangement to make any payment) by any System institution for the
benefit of any person who is or was an IRP of such System institution,
to pay or reimburse such person for any civil money penalty or judgment
resulting from any administrative or civil action instituted by the
FCA, or any other liability or legal expense with regard to any
[[Page 42611]]
administrative proceeding or civil action instituted by the FCA which
results in a final order or settlement pursuant to which such person:
(i) Is assessed a civil money penalty;
(ii) Is removed from office or prohibited from participating in the
conduct of the affairs of the institution; or
(iii) Is required to cease and desist from or take any affirmative
action with respect to such institution.
(2) Exceptions. (i) The term ``prohibited indemnification'' payment
shall not include any reasonable payment by a System institution which
is used to purchase any commercial insurance policy or fidelity bond,
provided that such insurance policy or bond shall not be used to pay or
reimburse an IRP for the cost of any judgment or civil money penalty
assessed against such person in an administrative proceeding or civil
action commenced by the FCA, but may pay any legal or professional
expenses incurred in connection with such proceeding or action or the
amount of any restitution to the System institution or receiver.
(ii) The term ``prohibited indemnification payment'' shall not
include any reasonable payment by a System institution that represents
partial indemnification for legal or professional expenses specifically
attributable to particular charges for which there has been a formal
and final adjudication or finding in connection with a settlement that
the IRP has not violated certain FCA laws or regulations or has not
engaged in certain unsafe or unsound practices or breaches of fiduciary
duty, unless the administrative action or civil proceedings has
resulted in a final prohibition order against the IRP.
(m) Troubled condition means a System institution that:
(1) Is subject to a cease-and-desist order or written agreement
issued by the FCA that requires action to improve the financial
condition of the System institution or is subject to a proceeding
initiated by the FCA which contemplates the issuance of an order that
requires action to improve the financial condition of the institution,
unless otherwise informed in writing by the FCA; or
(2) Is unable to make a timely payment of principal or interest on
any insured obligation (as defined in section 5.51(3) of the Farm
Credit Act; 12 U.S.C. 2277a(3)); or
(3) Is receiving assistance as described in section 5.61 of the
Farm Credit Act, 12 U.S.C. 2277a-10; or
(4) Is unable to make timely payment of principal or interest on
debt obligations issued under the authority of section 8.6(e)(2) of the
Farm Credit Act; 12 U.S.C. 2279aa-6(e)(2) or is unable to fulfill the
guarantee obligations provided under section 8.6 of the Farm Credit
Act; 12 U.S.C. 2279aa-6; or
(5) Is informed in writing by the Corporation that it is in a
``troubled condition'' for purposes of the requirements of this subpart
on the basis of the System institution's most recent report of
condition or report of examination or other information available to
the Corporation.
Sec. 1412.3 Golden parachute payments prohibited.
No System institution shall make or agree to make any golden
parachute payment, except as provided in this part.
Sec. 1412.4 Prohibited indemnification payments.
No System institution shall make or agree to make any prohibited
indemnification payment, except as provided in this part.
Sec. 1412.5 Permissible golden parachute payments.
(a) A System institution may agree to make or may make a golden
parachute payment if and to the extent that:
(1) The FCA, with the written concurrence of the Corporation,
determines that such a payment or agreement is permissible; or
(2) Such an agreement is made in order to hire a person to become
an IRP either at a time when the System institution satisfies or in an
effort to prevent it from imminently satisfying any of the criteria set
forth in Sec. 1412.2(f)(1)(ii), and the FCA and the Corporation
consent in writing to the amount and terms of the golden parachute
payment. Such consent by the Corporation and the FCA shall not improve
the IRP's position in the event of the insolvency of the institution
since such consent can neither bind a receiver nor affect the
provability of receivership claims. In the event that the institution
is placed into receivership or conservatorship, the Corporation and/or
the FCA shall not be obligated to pay the promised golden parachute and
the IRP shall not be accorded preferential treatment on the basis of
such prior approval; or
(3) Such a payment is made pursuant to an agreement which provides
for a reasonable severance payment, not to exceed 12-months' salary, to
an IRP in the event of a change in control of the System institution;
provided, however, that the System institution shall obtain the consent
of the FCA prior to making such a payment and this paragraph (a)(3)
shall not apply to any change in control of System institution which
results from an assisted transaction as described in section 5.61 of
the Farm Credit Act; 12 U.S.C. 2277a-10 or the System institution being
placed into conservatorship or receivership; and
(4) A System institution or IRP making a request pursuant to
paragraphs (a)(1) through (3) of this section shall demonstrate that it
is not aware of any information, evidence, documents or other materials
which would indicate that there is a reasonable basis to believe, at
the time such payment is proposed to be made, that:
(i) The IRP has committed any fraudulent act or omission, breach of
trust or fiduciary duty, or insider abuse with regard to the System
institution that has had or is likely to have a material adverse effect
on the institution;
(ii) The IRP is substantially responsible for the insolvency of,
the appointment of a conservator or receiver for, or the troubled
condition, as defined by applicable regulations concerning the System
institution;
(iii) The IRP has materially violated any applicable Federal or
state law or regulation that has had or is likely to have a material
effect on the System institution; and
(iv) The IRP has violated or conspired to violate section 215, 657,
1006, 1014, or 1344 of title 18 of the United States Code or section
1341 or 1343 of such title affecting a Farm Credit System institution.
(b) In making a determination under paragraphs (a)(1) through (3)
of this section the FCA and the Corporation may consider:
(1) Whether, and to what degree, the IRP was in a position of
managerial or fiduciary responsibility;
(2) The length of time the IRP was affiliated with the System
institution, and the degree to which the proposed payment represents
reasonable compensation earned over the period of employment and
reasonable payment for services rendered; and
(3) Any other factors or circumstances which would indicate that
the proposed payment would be contrary to the intent of the Act or this
part.
Sec. 1412.6 Permissible indemnification payments.
(a) A System institution may make or agree to make reasonable
indemnification payments to an IRP with respect to an administrative
proceeding or civil action initiated by the FCA if:
[[Page 42612]]
(1) The System institution's board of directors, in good faith,
determines in writing after due investigation and consideration that
the IRP acted in good faith and in a manner he/she believed to be in
the best interests of the institution;
(2) The System institution's board of directors, in good faith,
determines in writing after due investigation and consideration that
the payment of such expenses will not materially adversely affect the
institution's safety and soundness;
(3) The indemnification payments do not constitute prohibited
indemnification payments as that term is defined in Sec. 1412.2(l);
and
(4) The IRP agrees in writing to reimburse the System institution,
to the extent not covered by payments from insurance or bonds purchased
pursuant to Sec. 1412.2(l)(2), for that portion of the advanced
indemnification payments which subsequently become prohibited
indemnification payments, as defined herein.
(b) An IRP requesting indemnification payments shall not
participate in any way in the board's discussion and approval of such
payments; provided, however, that such IRP may present his/her request
to the board and respond to any inquiries from the board concerning
his/her involvement in the circumstances giving rise to the
administrative proceeding or civil action.
(c) In the event that a majority of the members of the board of
directors are named as respondents in an administrative proceeding or
civil action and request indemnification, the remaining members of the
board may authorize independent legal counsel to review the
indemnification request and provide the remaining members of the board
with a written opinion of counsel as to whether the conditions
delineated in paragraph (a) of this section have been met. If
independent legal counsel opines that said conditions have been met,
the remaining members of the board of directors may rely on such
opinion in authorizing the requested indemnification.
(d) In the event that all of the members of the board of directors
are named as respondents in an administrative proceeding or civil
action and request indemnification, the board shall authorize
independent legal counsel to review the indemnification request and
provide the board with a written opinion of counsel as to whether the
conditions delineated in paragraph (a) of this section have been met.
If independent legal counsel opines that said conditions have been met,
the board of directors may rely on such opinion in authorizing the
requested indemnification.
Sec. 1412.7 Filing instructions.
Requests to make excess nondiscriminatory severance plan payments
and permitted golden parachute payments shall be submitted in writing
to the FCA and the Corporation. The request shall be in letter form and
shall contain all relevant factual information as well as the reasons
why such approval should be granted.
Sec. 1412.8 Applicable in the event of receivership.
The provisions of this part or any consent or approval granted
under the provisions of this part by the Corporation (in its corporate
capacity), shall not in any way bind any receiver of a failed System
institution. Any consent or approval granted under the provisions of
this part by the Corporation or the FCA shall not in any way obligate
such agency or receiver to pay any claim or obligation pursuant to any
golden parachute, severance, indemnification or other agreement. Claims
for employee welfare benefits or other benefits which are contingent,
even if otherwise vested, when the Corporation is appointed as receiver
for any System institution, including any contingency for termination
of employment, are not provable claims or actual, direct compensatory
damage claims against such receiver. Nothing in this part may be
construed to permit the payment of salary or any liability or legal
expense of any IRP contrary to 12 U.S.C. 2277a-10b(d).
Dated: July 13, 2004.
Jeanette C. Brinkley,
Secretary to the Board, Farm Credit System Insurance Corporation.
[FR Doc. 04-16225 Filed 7-15-04; 8:45 am]
BILLING CODE 6710-01-P