allowed were of PCAs and FLBAS (or FLCAS) that shared the same territory.

As a result, the pace of consolidation and the formation of new ACAs slowed. At the same time, FLBAS and FLCAs became increasingly reluctant to surrender their tax-exempt status by consolidating to form ACAS, which are fully taxable. From 1993 to 1999, FCA chartered just one new ACA, Beginning in 1992, the number of ACAS declined as existing ACAs began to merge with one another.

Emergence of a New Association
Structure

While the FCA Board recognized the dramatic changes that the System had undergone in the past quarter century, it also acknowledged the need to facilitate further evolution if System institutions were to become more efficient and competitive in the marketplace. Such an opportunity first presented itself in 1999 when an Agricultural Credit Association asked the FCA Board to approve an innovative application. The ACA asked to restructure by establishing a Federal Land Crecit Association subsidiary to provide long-term credit and a Production Credit Association subsidiary to provide shortand intermediate-term credit to its member-borrowers. With stockholder approval, FCA chartered the first subsid iaries of an ACA. Under this structure, the FLCA subsidiary is exempt from Federal taxes, however, the ACA parent and its PCA subsidiary remain taxable. In FY 1999, we approved the initial application and one additional ACA restructuring request. In FY 2000, we approved seven and, in FY 2001, we approved 20.

Once the FCA Board approved the first

FLBAS) that previously had decided against consolidating to form ACAS, because the ACA was taxable and/or because their chartered territories were different, began to file applications to consolidate to form ACAS with subsidiaries. Ir. FY 1999, no associations asked to form ACAS; in 2000, we approved 3 consolidations to form ACAS, and in 2001, we approved 25 such consolidations.

Often, the ACA charters we issued included territory of adjoining PCAs and FLCAS. We gave these associations an opportunity to convert their charters to ACAs and, in the past year, 10 PCAs and FLCAs converted to ACAS as a result. In addition, two PCAs and one FLCA were unable to negotiate consolidations to form ACAs with neighboring associations. To be able to provide their customers with the one-stop, full-service advantages of the ACA parent/subsidiary structure, these associations requested that FCA convert their charters to ACAS even though no other ACAs were operating within their territory. These three requests were approved in 2001. To the extent permitted by the Farm Credit Act, all ACAs are able to offer short, intermediate-, and longterm lending to customers throughout their entire territory.

Concluding Note

The 1987 Act provided significant opportunities for PCAS and FLBAS to improve credit delivery to their member-borrowers and new customers. Significant restructuring at both the bank and association level occurred between 1988 and 1991. Corporate activity at the association level slowed after 1991. The taxable status of the ACA and PCA versus the tax-exempt status of the FLBA and FLCA also

In 1998, independent and contract turkey producers in Michigan faced the cancellation of their contracts with the facility that processed their birds. Worried about the future of their farms and of the nearly 200 people on their payrolls, 15 growers banded together to form the Michigan Turkey Producers Cooperative.

Despite obtaining contracts out-of-state for almost a third of their normal production, the cost of shipping the birds long distance for processing was prohibitive. The co-op members knew that to stay in business they needed a local facility to process their turkeys. They turned to financial partners, including CoBank and Greenstone Agricultural Credit Association, which are both part of the borrower-owned, cooperative Farm Credit System. With their help, the producers formed Michigan Turkey Producers, L.L.C. (MTP), and opened an innovative facility that prepares turkeys for sale to other processors.

The co-op bought and renovated a frenchfry factory in Wyoming, Michigan. The eight-month renovation of the plant, which opened in March 2000, included installation of new technologies that ensure food safety and product quality. But the co-op had to start from scratch in other ways, too, says Dan Lennon, President of MTP. "We didn't just have to prepare for processing, but also had to set up accounting and information systems and hire and train a workforce."

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Board's approval of the new ACA parent/subsidiary structure in 1999 opened an avenue for associations' widespread adoption of the ACA parent/ subsidiary structure as their preferred method of credit delivery in 2001.

Regulations and Bookletters

To ensure that FCS institutions comply with laws and operate in a safe and sound manner, FCA issues regulations and policy statements. We also issue Bookletters to provide guidance for the FCS. We regulate the FCS not only to ensure safety and soundness and compliance with laws, but also to ensure that the PCS efficiently carries out its statutory mission. In FY 2001, FCA amended its rules to increase opportunities for agriculture and rural America and create a more flexible regulatory environment for FCS institutions to increase their efficiency. The following activities illustrate our efforts.

National Charters

We proposed a regulation to allow FCS direct-lender associations to obtain national charters so they are less restricted by geographical boundaries in serving farmers, ranchers, and aquatic producers. The proposal provided for a local service area in which an association with a national charter must provide dependable, adequate, competitive, and constructive credit and related services to all eligible and creditworthy customers on a priority basis, consistent with safe and sound lending practices.

We believed this proposed regulation would increase credit and financial sources for agriculture and rural

published February 16, 2001 [66 FR 10639)) We subsequently extended the comment period on the proposed rule to April 20, 2001. (Adopted March 16, 2001; published March 21, 2001 [66 FR 15814]) At the beginning of FY 2002 (October 11, 2001), staff presented a draft final rule to the FCA Board. At the meeting, the FCA Board members, by their actions, indicated that they would not proceed with the rule and instead directed staff to begin work on a policy statement relating to the mission of the System. Staff was also directed to develop an updated regulation on business planning.

Public Meeting on OFIs and Alternative Funding Mechanisms

We held a public meeting in Des Moines, Iowa, on August 3, 2001, about the funding and discount relationship between other financing institutions and System banks.

We were seeking the public's views about changes to the current regulatory framework. This meeting also addressed other partnering relationships between FCS and non FCS financial service providers that could increase the availability of credit for agriculture and rural America.

We will use this public input in revising our OFI regulations and initiating other programs that encourage FCS and nonFCS lenders to work together to improve the flow of credit to agriculture and rural America. We began the current rulemaking on OFIs with an advance notice of proposed rulemaking that was published in the Federal Register on April 20, 2000 (65 FR 21121). The meeting allowed us to explore options for broadening our approach to FCS institutions'

alliances with other agricultural lenders. (Public meeting announcements published

in the Federal Register on July 5, 2001 [66 FR 35428] and July 16, 2001 [66 FR 37681])

Stock Issuances

We issued a final rule that allows FCS service corporations to sell stock to nonFCS entities but requires adequate disclosure to investors. The rule allows an association to issue unlimited amounts of stock to its funding bank in exchange for capital the association, in turn, may distribute to its borrowers. The rule gives FCS institutions more opportunities to serve their borrowers' needs through service corporations and more efficient issuance of equities related to earnings distributions and transfers of capital. (Adopted March 8, 2001; published March 28, 2001 [66 FR 16841]; effective May 14, 2001)

Electronic Commerce

We proposed regulations reflecting emerging business approaches to electronic commerce (e-commerce). The proposed rules are designed to remove regulatory barriers to e-commerce and create a flexible regulatory environment that facilitates the safe and sound use of new technologies by FCS institutions and their customers. (Adopted September 13, 2001; published October 22, 2001 [66 FR 53348]; comment period ended November 21, 2001)

Termination of Farm Credit Status We reproposed regulations to allow an FCS institution to terminate its FCS charter and become a financial institution under another Federal or state chartering authority. The proposal would amend the existing regulations so they apply to all FCS banks and associations. In addition, the rule would ensure that (1) all equity holders of a terminating institution are treated fairly and equitably and (2) remaining FCS institutions are able to operate safely and soundly and fulfill their statutory mandate to serve the credit needs of farmers, ranchers, and cooperatives. This rule benefits System institution shareholders who believe a change is needed in their institution's structure while ensuring that an exit fee is paid to the Farm Credit Insurance Fund in accordance with the law. (Adopted July 12, 2001; published August 20, 2001 [66 FR 43536]; comment period ended October 19, 2001)

Farmer Mac Risk-Based Capital We issued a final rule that established riskbased capital regulations for Farmer Mac, including definitions, methods, parameters, and guidelines for developing and implementing the risk-based capital stress test. The final rule also specifies capital calculation, reporting, and compliance requirements and describes our monitoring, examination, supervisory, and

Farmer Mac's compliance. Finally, the rule prescribes certain requirements for business and capital planning. This rule is designed to help to ensure that Farmer Mac is able to maintain solvency even during a period of severe credit and economic risk in agriculture. (Adopted February 21, 2001; published April 12, 2001 [66 FR 19048]; effective May 23, 2001)

Loans to Designated Parties We reproposed regulations governing the approval of loans to "designated parties," those FCS "insiders" most likely to have a conflict of interest and FCA and FCSIC employees who are authorized to borrow from the System. The reproposed rule would require an FCS institution's board, or its delegated committee, to approve all joans to a designated party that exceed the greater of $150,000 or 0.5 percent of permanent capital (not to exceed $250,000). The rule would also eliminate the System banks' approval requirement and include an option allowing an association to enter into an agreement with its affiliated bank to permit the bank to perform the designated-party loan approval. These amendments provide flexibility for System institutions to manage loan approvals appropriately but ensure proper internal controls on loans to designated parties. (Adopted August 9, 2001; published September 18, 2001, [66 FR 48098]; comment period ended October 18, 2001)

Disclosures to Shareholders

We issued a final rule providing that an PCS bank need not distribute its annual report to shareholders of its related associations unless it experiences a "significant event." The rule also requires

section of their annual report, specified information about their financial and supervisory relationship with their funding bank. This final rule benefits FCS banks, associations, and their shareholders because banks and associations may reduce the cost of sharing necessary information with shareholders. (Adopted February 21, 2001; published March 12, 2001 [66 FR 14299]; effective April 27, 2001)

Capital Treatment of FCS Financial Assistance Corporation Debt Expense

Bookletter

We provided guidance on the risk-based capital treatment of Farm Credit System Financial Assistance Corporation debt expense. The Bookletter specifies the Treasury repayment date under section 6.26(c)(5)(G) of the Farm Credit Act and provides guidance on the treatment of payments to the FAC for regulatory capital. This guidance helped System institutions plan for expenses and capital needs. (Dated June 27, 2001)

Eligibility

As a result of a January 19, 1999, decision of the U.S. Court of Appeals for the District of Columbia Circuit, we issued a direct final rule amending two regulations that govern eligibility and scope of financing for farm-related service businesses and nonfarm rural homeowners. In accordance with the court's decision, System banks and associations that extend long-term mortgage credit will be able to finance only necessary capital structures, equipment, and initial working capital for eligible farm-related service businesses. In addition, the revised rule allows System banks and associations to finance only homes that people who live in rural areas