[Federal Register Volume 59, Number 40 (Tuesday, March 1, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-4536]


[[Page Unknown]]

[Federal Register: March 1, 1994]


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FARM CREDIT ADMINISTRATION

12 CFR Part 650

RIN 3052-AB49

 

Federal Agricultural Mortgage Corporation; Conflicts of Interest

AGENCY: Farm Credit Administration.

ACTION: Final rule.

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SUMMARY: The Farm Credit Administration (FCA), by the Farm Credit 
Administration Board, adopts a new regulation relating to reporting and 
disclosure of conflicts of interest by directors, officers, and 
employees of the Federal Agricultural Mortgage Corporation 
(Corporation). The regulation is adopted in response to section 514 of 
the Farm Credit Banks and Associations Safety and Soundness Act of 
1992. Section 514 directs the FCA to ensure that its regulations 
require the disclosure of financial information and the reporting of 
potential conflicts of interest by directors, officers, and employees 
of all Farm Credit System (System) institutions and that such 
requirements are adequate to fulfill the purposes of the section.
    The regulation requires the Corporation to adopt a conflict-of-
interest policy that defines the types of relationships, transactions, 
or activities that might reasonably be expected to give rise to a 
potential conflict of interest. The regulation also requires the 
reporting of sufficient information about financial interests, 
transactions, relationships, and activities to inform the Corporation 
about potential conflicts of interest. The regulation further requires 
disclosure to shareholders, investors, and potential investors of any 
unresolved conflicts of interest involving its directors, officers, and 
employees identified by the Corporation under the policy. Such 
disclosure is in addition to disclosures already required under the 
Federal securities laws.

EFFECTIVE DATE: The regulation shall become effective 180 days after 
publication in the Federal Register or on such later date as may be 
necessary to comply with the statutory requirement for a delayed 
effective date of 30 days after Federal Register publication during 
which either or both Houses of Congress are in session. Notice of the 
effective date will be published in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Suzanne J. McCrory, Director, Office 
of Secondary Market Oversight, Farm Credit Administration, McLean, VA 
22102-5090 (703) 883-4280, TDD (703) 883-4444.

SUPPLEMENTARY INFORMATION: On October 14, 1993, the FCA published for 
comment conflict-of-interest regulations (58 FR 53161) for the 
Corporation. The regulations were proposed in response to section 514 
of the Farm Credit Banks and Associations Safety and Soundness Act of 
1992, Pub. L. 102-552, 106 Stat. 4102 (1992 Act). The 1992 Act directed 
the FCA to review its current regulations regarding the disclosure of 
financial information and the reporting of potential conflicts of 
interest by the directors, officers, and employees of System 
institutions to determine whether the regulations: (1) Are adequate to 
fulfill the purpose of section 514 and other purposes determined by the 
FCA to be necessary or appropriate, consistent with the Farm Credit Act 
of 1971, as amended (1971 Act); (2) require the disclosure of financial 
information and reporting of potential conflicts of interest by the 
directors, officers, and employees of all System institutions; and (3) 
require such disclosure of all of the appropriate directors, officers, 
or employees of System institutions. The 1992 Act further directed the 
FCA to amend its current financial disclosure and conflict-of-interest 
regulations to carry out the purpose of section 514, which is to ensure 
that FCA regulations require the disclosure of financial information 
and the reporting of potential conflicts of interest to provide 
sufficient information for: (1) Stockholders to make informed decisions 
regarding the operation of the institutions; (2) investors and 
potential investors to make informed investment decisions; and (3) the 
FCA to examine and regulate all System institutions effectively and 
efficiently.
    The comment period closed on November 15, 1993. Comments were 
received from the Corporation and from The Farm Credit Council (FCC), a 
trade association for the banks and associations of the System. The 
Farm Credit Bank of Baltimore submitted a letter endorsing the comments 
of the FCC.
    The Corporation supported the regulatory approach to conflicts of 
interest, but made a number of substantive and clarifying comments. 
Most notably, the Corporation asserted that the definition of 
``employee'' is broader than necessary to effectuate the stated purpose 
of the 1992 Act and will result in irrelevant or immaterial reporting 
by receptionists, secretaries, bookkeepers, clerks, and other employees 
without regard to their functions or duties at the Corporation. The 
Corporation noted that its existing policies also define ``employee'' 
broadly, but reporting requirements are tailored to screen out 
reporting by employees who are not in a position to influence activity 
with respect to their financial interests.
    The Corporation suggested that the term ``employee'' be replaced 
with the term ``key employee,'' defined to mean ``any salaried manager 
or supervisor or part-time, full-time, or temporary salaried employee 
who is involved in any significant activity related to the processing, 
analysis, or guarantee of loan pools or other significant financial 
activity or who is engaged in any policy-making, managerial, 
supervisory, or professional function for the Corporation.'' This 
definition would apply only to employees other than officers and 
directors, who are already specifically referenced in the regulation.
    The FCA is opposed to removing groups of employees from the 
regulation's applicability. Although the proposed regulation broadly 
defines potential conflicts of interest to apply to all employees, it 
requires the Corporation to define the types of specific transactions, 
relationships, and activities that reasonably could be expected to give 
rise to potential conflicts of interest and to require reporting of 
sufficient information to inform the Corporation of these potential 
conflicts of interest. The FCA believes that the regulation gives the 
Corporation sufficient latitude to tailor its reporting requirements 
based upon the function various employees perform for the Corporation. 
The FCA believes that each employee, no matter what his or her 
function, should be subject to a requirement to report any matter that 
might adversely affect impartiality in the performance of his or her 
duties. Accordingly, the FCA declines to replace the term ``employee'' 
with the term ``key employee'' in the definition of ``potential 
conflict of interest.'' However, because officers are separately 
defined, the FCA has amended the definition of ``employee'' to exclude 
officers.
    The Corporation and the FCC requested that the language of the 
regulation be amended to clarify that only material conflicts need to 
be resolved to avoid disclosure. The FCA confirms that this is the 
intended result and adopts minor language changes to the definition of 
``resolved'' and to Sec. 650.3 to make this point clearer.
    The Corporation requested that the regulation be modified to 
provide a defined period of time for the development of the conflict-
of-interest policy by the Corporation and suggested that a reasonable 
time period would be 180 days from the effective date of the final 
rule, noting that developing such a policy will involve issues that 
must be decided by the Corporation's Board (Board).
    The FCA recognizes that the policy required by the regulation may 
be different from the Corporation's existing policy and that Board 
participation in its development is required. Indeed, in requiring the 
Corporation to adopt a conflict-of-interest policy, the FCA 
contemplated that the Corporation must act through its board of 
directors. The FCA views the request as a reasonable one, but believes 
that 180 days from the date of publication of the final rule should be 
a sufficient period to develop a policy. Consequently, the FCA has 
adopted a delayed effective date of 180 days after publication in the 
Federal Register or such later date as may be necessary to comply with 
the statutory requirement for a delayed effective date of 30 days 
during which either or both Houses of Congress are in session. In the 
interim, the FCA expects that employees of the Corporation and its 
subsidiaries will adhere to high standards of honesty, integrity, 
impartiality, loyalty, and care consistent with applicable law and 
regulation in furtherance of the Corporation's public purpose. The FCA 
further expects that the Corporation will be vigilant in monitoring and 
resolving potential conflicts of interest under its existing policy.
    The Corporation also suggested adding a requirement to establish 
procedures for resolving material conflicts of interest and for 
maintaining adequate records of non-material conflicts of interest and 
resolutions of material conflicts of interest. The FCA believes that 
these requirements are fairly implied from the requirement to disclose 
unresolved conflicts of interest and the requirement to retain, for a 
period of 6 years, reports and statements on potential conflicts of 
interests and documentation of materiality determinations and 
resolutions of conflict of interests. However, an express requirement 
to develop procedures for resolving material conflicts of interest has 
been added as paragraph (e) of Sec. 650.2 of the final regulation and 
succeeding paragraphs have been renumbered.
    The FCC expressed general agreement with the rationale underlying 
the FCA's decision to treat the Corporation differently from System 
banks and associations, but expressed reservations about the extent of 
delegation granted to the Corporation to define its own conflict-of-
interest policy, especially with regard to standards that may be 
established for members of the Board. In particular, the FCC asserted 
that the emphasis in the preamble on the fiduciary duties of directors 
to all of the shareholders ignores the representative character of the 
board of directors.\1\ Although the FCC agrees that traditional 
concepts of fiduciary responsibility apply, it asserts that System and 
non-System directors are under no obligation to disregard the interests 
of the shareholders who elected them, and that to prohibit 
participation by System directors or non-System directors in board 
deliberations and voting on matters potentially affecting the interests 
of System institutions or non-System institutions would be contrary to 
congressional intention.
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    \1\The Corporation's Board is composed of 15 directors--5 
elected by class A shareholders (non-System financial institutions 
such as commercial banks and insurance companies), 5 elected by 
class B shareholders (System institutions), and 5 appointed by the 
President.
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    In addition, the FCC asserted that it would be inappropriate for 
the Corporation to adopt a policy that prohibits directors from 
discussing matters deemed confidential by Corporation management with 
anyone other than Board members and employees of the Corporation, as it 
would impede directors in the exercise of their independent business 
judgment if they were unable to disclose information to their own 
advisors. The FCC noted that ``legitimately confidential'' information 
would, of course, be disclosed to advisors on a confidential basis. In 
addition, the FCC asserted that System directors must be free to 
discuss information with a reasonable number of other individuals who 
represent System institutions, subject to strict guarantees of 
confidentiality.
    The principles of statutory construction require that all of a 
statute's provisions be interpreted together. As the FCC has noted, the 
representative character of the Corporation's Board must be reconciled 
with its corporate structure and associated principles of corporate 
governance. In the FCA's opinion, such a reconciliation can be achieved 
by: (1) Interpreting ``representative'' to be a qualification for 
office; and (2) recognizing that directors owe fiduciary duties to the 
Corporation and all its shareholders (rather than to the electing class 
of shareholders exclusively or primarily). The FCA's interpretation of 
``representative'' does not require elected directors to disregard the 
perspectives of the electing class. Rather, directors should share 
these perspectives with the Board at large so that each director can 
act in the best interests of the Corporation and all of its 
shareholders.
    The FCA believes that the statutory term ``representative'' means 
that elected directors must have an official affiliation with a class A 
or class B institution in order to serve as a Corporation director. The 
FCA views an official affiliation as a substantial and visible 
connection such as serving as director, officer, or employee of a class 
A or class B institution. This interpretation of ``representative'' 
stems in part from the vacancy and continuation of membership 
provisions of sections 8.2(a)(4) and 8.2(b)(5)of the 1971 Act. Vacancy 
of an elected Board seat is filled by the permanent Board ``from among 
persons eligible for election to the position for which the vacancy 
exists,'' suggesting that some objective eligibility criterion exists 
other than being elected by the shareholder class. The continuation 
provision has the effect of terminating the term of a director when he 
or she ceases to be ``a representative.'' By contrast, were 
``representative'' interpreted broadly to mean anyone who is selected 
by the institutions to act as a delegate, everybody would be eligible 
for election when a vacancy occurred and the automatic termination 
provisions would not work. Taken together, these provisions suggest 
that elected directors must have an official affiliation that is 
visible and substantial so that the presence and termination of this 
affiliation can be readily ascertained.
    Although the Board is representative in nature, Congress chose a 
corporate structure to govern the operations of the Corporation. Common 
law corporate principles affirm the fiduciary duty of directors to act 
in the best interests of the Corporation and all of its shareholders. 
The FCA believes that the representative character of the Board does 
nothing to alter this fiduciary duty of directors.\2\ That is, 
irrespective of the manner of appointment or election, each director 
has a duty to act in the best interests of the Corporation and all of 
its shareholders. The legislative history supports this interpretation 
by indicating, ``There is to be no distinction between the three 
categories of directors in terms of their duties and responsibilities 
as directors to the Mortgage Corporation and all stockholders.''\3\
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    \2\Some public companies have boards with representative 
features analogous though not identical to the Corporation's. For 
example, public companies may have seats designated to be elected by 
minority shareholders or seats designated to be filled by a union 
representative. However, the fiduciary responsibilities of directors 
are unchanged by the representational aspects of these boards, 
according to an official from the Securities and Exchange Commission 
with whom the FCA consulted. Each director owes fiduciary duties to 
the Corporation and its shareholders collectively.
    \3\Senate Report 100-230, p. 52 (November 20, 1987).
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    When ``representative'' is interpreted as a qualification that 
directors must satisfy to be elected, directors can discharge their 
fiduciary duties in the context of a representative Board. Although 
directors may attain Board seats through different processes, each 
needs the same opportunity to understand the perspectives of different 
shareholders and secondary market participants on an issue to properly 
discharge his or her fiduciary duties to the Corporation. With an 
official affiliation, elected directors are authoritatively able to 
bring the perspectives of the class to the Board's deliberations. When 
the elected directors convey such perspectives to the Board at large, 
each director gets the information needed to discharge his or her 
fiduciary duties to the Corporation and all of its shareholders.
    The FCA believes that ``representative'' should not be interpreted 
to mean a delegate elected solely to further the viewpoints of the 
electing class without regard to the impact on the Corporation and all 
its shareholders. Such an interpretation implies that directors need 
not consider the interests of any class of Corporation shareholders 
lacking authority to elect them--a result inconsistent with corporate 
common law principles of a director's fiduciary duties and 
congressional intent.
    Specifically, the FCA responds to the FCC's comment by noting that 
the use of information gained in private consultations with class 
members about Corporation matters to inform only a director's personal 
judgments but not the Board deliberations would systematically prevent 
class A directors from learning the views of class B institutions and 
class B directors from learning the views of class A institutions. The 
``public directors'' would have neither perspective. This withholding 
of information would likely lead to factional voting patterns because 
no director would be able to understand and weigh the many and 
different views of all shareholders. Because each director is obliged 
to act in the best interests of the Corporation and all of its 
shareholders, the FCA believes that withholding from Board 
deliberations useful perspectives and pertinent information gained from 
private consultations could undermine the ability of directors to carry 
out their fiduciary duties.
    In light of its interpretation of the ``representative'' nature of 
the Corporation's Board, the FCA makes the following determinations 
about three amendments requested by the FCC related to the 
representative character of the Board.
    First, the FCC requested that the definition of ``potential 
conflict of interest'' be modified to recognize that it is not a 
conflict of interest for Corporation directors to consider or act on 
matters that affect the financial interests of the class of 
shareholders that elected them if the matter is one of general 
applicability that affects all the shareholders in that class and does 
not have its effect exclusively or disproportionately on the particular 
shareholder with which that director is affiliated.
    The FCA agrees that ``potential conflict of interest'' should not 
be so broadly defined as to make it impermissible for any of the 10 
elected directors to participate in matters affecting the financial 
interests of the class or the institution with which he or she is 
affiliated. To regard participation by an elected director in such 
matters as impermissible would render the Board nonfunctional since 
such decisions are unavoidable and large blocs of directors would be 
disenfranchised on certain general questions being deliberated by the 
Board. However, the FCA believes that no change is needed to respond to 
the FCC's concerns because the regulation does not disqualify directors 
from participating in deliberations affecting the electing class of 
institutions.
    The FCA believes that matters affecting class institutions as 
secondary market participants would not likely constitute potential 
conflicts of interests. Therefore, the regulatory definition of 
``potential conflict of interest'' does not impute the interests of the 
class to the directors elected from that class. However, FCA notes that 
any Board action having differential effects on the class as 
shareholders may constitute a breach of fiduciary duties by directors. 
A director must act in the best interest of the Corporation and all of 
its shareholders.
    Second, the FCC requested that the regulation be modified to 
provide that Corporation directors may discuss with representatives of 
the shareholder class that elected them the implications of a proposed 
action that has general applicability and that such activity not be 
considered a conflict of interest.
    The regulation neither permits nor prohibits consultations by 
Corporation directors with outside parties. The appropriateness of such 
consultations depends on the facts and circumstances at hand. FCA 
declines to create a safe harbor for director consultations in order to 
avoid sanctioning consultations that might be inconsistent with a 
director's fiduciary duties.
    While the FCA agrees with the FCC that directors have a duty to 
exercise informed independent judgment on Corporation matters, and may 
from time to time need to consult knowledgeable advisors, the FCA also 
recognizes the right of the Corporation's Board to maintain the 
confidentiality of the Corporation's business matters. Consequently, 
the consultation of advisors in order to make an independent judgment 
must be undertaken with due regard for the Corporation's interest in 
maintaining confidentiality. Any advisors consulted by a director on a 
confidential matter would be bound by the Board's confidentiality 
constraints and could, by virtue of the consultation, become insiders 
of the Corporation subject to the prohibitions of the Securities 
Exchange Act of 1934 and rules thereunder. The director should make 
every effort to ensure that the confidentiality of consultations can 
and will be maintained. Fiduciary duty to the Corporation requires the 
director to share with the Board any material information in his or her 
possession that is germane to Board decisions, regardless of its 
source.
    Third, the FCC requested that the regulation be modified to 
recognize that the Corporation's directors are free to vigorously 
advance the interest of the institutions they represent, provided they 
make clear that they are not acting in their capacity as Corporation 
directors.
    The FCA declines to modify its regulation as requested because it 
believes that such a modification might sanction actions inconsistent 
with a director's fiduciary duties. As the FCC's comment letter noted, 
inherent within the organizational framework of the Corporation's Board 
is the potential for perceived conflicts of interest. Elected directors 
typically have simultaneous responsibilities to the Corporation and to 
a competing class A or B institution.
    The FCA agrees with the FCC's comment that such directors are not 
agents of the Corporation in all their doings and may also owe 
fiduciary duties to other institutions. However, the FCA believes a 
Corporation director who advances the interests of another institution 
must be mindful of his or her fiduciary duties to the Corporation and 
its shareholders, including System and non-System shareholders. Where 
directors have fiduciary duties to competing institutions, they must 
balance these duties to avoid harming either institution. To advance 
the interests of one corporation to which a director owes duties in a 
manner that injures another corporation to which he also owes fiduciary 
duties could heighten shareholder concern about the good faith and fair 
dealing of the director. The difficulty of balancing fiduciary duties 
to competing institutions has previously led the FCA to prohibit 
directors of Farm Credit banks and associations from serving as 
directors of competing institutions. While the FCA cannot prohibit such 
dual responsibilities, it is reluctant to sanction by regulation those 
actions by directors to advance the interests of one institution that 
are potentially at the expense of the Corporation's interests.
    As in the previous matter, the FCA believes that the 
appropriateness of a director's action must be evaluated in light of 
the specific circumstances. In some cases, action might be considered 
improper; in others it might not. As a result, the FCA declines to 
exclude from the definition of ``potential conflict of interest'' those 
actions by the Corporation's directors to ``advance vigorously the 
interests'' of a competing institution. The effect of declining to make 
such a change will be to continue to subject such actions to scrutiny 
as potential conflicts of interest.
    In addition to its general comments, the FCC made a number of 
specific suggestions regarding particular sections of the regulation.
    The FCC suggested that the definition of ``potential conflict of 
interest'' be changed to parallel the definition of ``conflict of 
interest'' in the regulations proposed for System banks and 
associations. Specifically, the FCC recommended changing ``might 
adversely affect or appear to adversely affect'' to ``actually affects 
or appears to affect.''
    The change proposed by the FCC would narrow the reportable 
conflicts to those that an individual believes would affect or would 
appear to affect the individual's impartiality. The FCA believes that 
it would be inappropriate to adopt the FCC's suggestion in light of the 
fact that the approach taken for Farm Credit banks and associations 
differs from the regulatory approach for the Corporation. Specifically, 
the FCA has prohibited certain activities for employees and directors 
of Farm Credit banks and associations. Because most conflicts are 
banned in the regulation, a narrower definition of reportable conflicts 
of interest seems appropriate. By contrast, Corporation directors, 
officers, and employees are not subject to similar regulatory 
prohibitions. In the absence of specific prohibitions, the FCA believes 
it important to have reporting requirements that establish the broadest 
possible net so that the actual existence of a conflict is determined 
by the Corporation rather than the reporting individual. The regulation 
allows the Corporation to review all potential conflicts of interest 
for materiality before determining that an actual conflict must be 
resolved or disclosed. Because the FCA believes the different 
regulatory approaches warrant different reporting requirements, the FCA 
declines to make the change requested by the FCC.
    The FCC asserted that the regulation should be extended to agents 
in a manner similar to that currently in effect for agents of System 
banks and associations, especially since many of the various aspects of 
the Corporation's business are accomplished through agents, and 
recommended a definition similar to that used for banks and 
associations.
    Although responding to the direction of the 1992 Act does not 
require that the regulation address conflicts of interest of agents, 
the FCA considered this suggestion in light of how the Corporation's 
business activities are structured. Since the statute permits the 
activities of the Corporation to be carried out through affiliates 
chartered under state law, the FCA concluded that the intention of 
section 514 could be subverted were the requirements of the regulation 
not applied to such affiliates. Accordingly, the final regulation 
clarifies that the Corporation policy required by the regulation must 
also apply to officers, directors, and employees of any affiliates the 
Corporation establishes to carry out its function. The clarification is 
accomplished by expanding the definition of ``Corporation'' to include 
affiliates established under section 8.3(b)(13) of the 1971 Act.
    Similarly, with respect to agents that are not affiliates, the 
final regulation would require the Corporation's policy to address 
potential conflicts of interest by agents. The FCA recognizes that the 
Corporation has less control over agents that are not affiliates. The 
FCA believes the regulation is sufficiently flexible to permit the 
Corporation to make reasonable distinctions. Definitions of ``agent'' 
and ``affiliate'' have been added in the final regulation.
    The FCC suggested that the same basic due process and other 
protections set forth in the recently proposed System bank and 
association regulation be incorporated in the final regulation for the 
Corporation. The FCC deems this especially important in view of the 
fact that the penalties of part C of title V of the 1971 Act are 
available to enforce the policy. Specifically, the FCC suggested adding 
the following:
    (1) A requirement that all directors and employees be informed of 
the regulatory and policy requirements;
    (2) A requirement that the policy establish various criteria for 
business relationships and transactions to provide guidance to 
directors and employees;
    (3) A requirement that there be a reasonable time during which 
directors and employees may terminate prohibited transactions;
    (4) A requirement for recusal procedures;
    (5) A requirement for a standards-of-conduct officer and 
documentation of his or her actions; and
    (6) A requirement for appeal procedures.
    The FCA has considered each of these suggestions in light of the 
different approaches taken in the proposed regulations for the 
Corporation and for System banks and associations. Because of the 
different approach, the FCA believes that the specific requirements 
outlined in the proposed bank and association regulation are 
appropriate in some cases but not others. Specifically:
    (1) The FCA agrees that all directors and employees should be 
informed of the conflict-of-interest requirements and has added 
Sec. 650.2(g) to accomplish this.
    (2) Because Sec. 650.2(a) already requires the Corporation to 
define the types of activities, transactions, and relationships that 
could give rise to potential conflicts of interests, criteria for 
permissible business relationships and transactions will be 
established, at least by exclusion. Consequently, the FCA finds 
changing the regulation unnecessary.
    (3) The FCA agrees with the FCC that directors, officers, and 
employees should have an opportunity to bring themselves into 
compliance when the policy changes and has added language to that 
effect in Sec. 650.2(g).
    (4) In response to a Corporation comment, the FCA added a 
requirement that the Corporation's policy establish procedures for 
resolving and disclosing material conflicts of interest. The FCA has 
not specifically included a requirement that recusal procedures be 
established because recusal is just one way in which a conflict of 
interest can be resolved.
    (5) The FCA finds it unnecessary to require a standards-of-conduct 
officer, although the Corporation is free to appoint one, and believes 
that documentation requirements are already fairly implied from the 
recordkeeping requirement.
    (6) The Corporation may opt to establish appeals procedures as part 
of its resolution methods. However, the FCA declines to add such a 
requirement by regulation because procedures for conflict resolution 
are to be specified by the Corporation. The FCA believes that the 
appropriateness of appeal procedures can only be evaluated in light of 
the policy and procedures, which are yet to be developed. Finally, 
since the Corporation's policy must be adopted by the Board, directors 
will have an opportunity to address the concerns expressed in the FCC's 
letter as they deem appropriate.
    At the request of the FCC, the FCA changed ``highest standards'' to 
``high standards'' in Sec. 650.4(a)(1) to achieve consistency with the 
regulation governing Farm Credit banks and associations. The FCA finds 
it unnecessary to define ``director'' as the FCC requested. The FCA 
previously eliminated the definition in its proposed rules for Farm 
Credit banks and associations, making both regulations consistent.

List of Subjects in 12 CFR Part 650

    Agriculture, Banks, Banking, Conflicts of interest, Rural areas.

    For the reasons stated in the preamble, a new part 650 of chapter 
VI, title 12 of the Code of Federal Regulations is added to read as 
follows:

PART 650--FEDERAL AGRICULTURAL MORTGAGE CORPORATION

Subpart A--Conflicts of Interest

Sec.
650.1  Definitions.
650.2  Conflict-of-interest policy.
650.3  Implementation of policy.
650.4  Director, officer, employee, and agent responsibilities.

Subpart B--[Reserved]

    Authority: Secs. 5.9, 5.17, 8.11 of the Farm Credit Act; 12 
U.S.C. 2243, 2252, 2279aa-11; sec. 514 of Pub. L. 102-552, 106 Stat. 
4102.

Subpart A--Conflicts of Interest


Sec. 650.1  Definitions.

    (a) Agent means any person (other than a director, officer, or 
employee of the Corporation) who represents the Corporation in contacts 
with third parties or who provides professional services such as legal, 
accounting, or appraisal services to the Corporation.
    (b) Affiliate means any entity established under authority granted 
to the Corporation under section 8.3(b)(13) of the Farm Credit Act of 
1971, as amended.
    (c) Corporation means the Federal Agricultural Mortgage Corporation 
and its affiliates.
    (d) Employee means any salaried individual working part-time, full-
time, or temporarily for the Corporation.
    (e) Entity means a corporation, company, association, firm, joint 
venture, partnership (general or limited), society, joint stock 
company, trust (business or otherwise), fund, or other organization or 
institution.
    (f) Material, when applied to a potential conflict of interest, 
means the conflicting interest is of sufficient magnitude or 
significance that a reasonable observer with knowledge of the relevant 
facts would question the ability of the person having such interest to 
discharge official duties in an objective and impartial manner in 
furtherance of the interests and statutory purposes of the Corporation.
    (g) Officer means the salaried president, vice presidents, 
secretary, treasurer, and general counsel, or other person, however 
designated, who holds a position of similar authority in the 
Corporation.
    (h) Person means individual or entity.
    (i) Potential conflict of interest means a director, officer, or 
employee of the Corporation has an interest in a transaction, 
relationship, or activity that might adversely affect, or appear to 
adversely affect, the ability of the director, officer, or employee to 
perform his official duties on behalf of the Corporation in an 
objective and impartial manner in furtherance of the interest of the 
Corporation and its statutory purposes. For the purpose of determining 
whether a potential conflict of interest exists, the following 
interests shall be imputed to a person subject to this regulation as if 
they were that person's own interests:
    (1) Interests of that person's spouse;
    (2) Interests of that person's minor child;
    (3) Interests of that person's general partner;
    (4) Interests of an organization or entity that the person serves 
as officer, director, trustee, general partner or employee; and
    (5) Interests of a person, organization, or entity with which that 
person is negotiating for or has an arrangement concerning prospective 
employment.
    (j) Resolved, when applied to a potential conflict of interest that 
the Corporation has determined is material, means that circumstances 
have been altered so that a reasonable observer with knowledge of the 
relevant facts would conclude that the conflicting interest would not 
adversely affect the person's performance of official duties in an 
objective and impartial manner in furtherance of the interests and 
statutory purposes of the Corporation.


Sec. 650.2  Conflict-of-interest policy.

    The Corporation shall establish and administer a conflict-of-
interest policy that will provide reasonable assurance that the 
directors, officers, employees, and agents of the Corporation discharge 
their official responsibilities in an objective and impartial manner in 
furtherance of the interests and statutory purposes of the Corporation. 
The policy shall, at a minimum:
    (a) Define the types of transactions, relationships, or activities 
that could reasonably be expected to give rise to potential conflicts 
of interest.
    (b) Require each director, officer, and employee to report in 
writing, annually, and at such other times as conflicts may arise, 
sufficient information about financial interests, transactions, 
relationships, and activities to inform the Corporation of potential 
conflicts of interest;
    (c) Require each director, officer, and employee who had no 
transaction, relationship, or activity required to be reported under 
paragraph (b) of this section at any time during the year to file a 
signed statement to that effect;
    (d) Establish guidelines for determining when a potential conflict 
is material in accordance with this subpart;
    (e) Establish procedures for resolving or disclosing material 
conflicts of interest.
    (f) Provide internal controls to ensure that reports are filed as 
required and that conflicts are resolved or disclosed in accordance 
with this subpart.
    (g) Notify directors, officers, and employees of the conflict-of-
interest policy and any subsequent changes thereto and allow them a 
reasonable period of time to conform to the policy.


Sec. 650.3  Implementation of policy.

    (a) The Corporation shall disclose any unresolved material 
conflicts of interest involving its directors, officers, and employees 
to:
    (1) Shareholders through annual reports and proxy statements; and
    (2) Investors and potential investors through disclosure documents 
supplied to them.
    (b) The Corporation shall make available to any shareholder, 
investor, or potential investor, upon request, a copy of its policy on 
conflicts of interest. The Corporation may charge a nominal fee to 
cover the costs of reproduction and handling.
    (c) The Corporation shall maintain all reports of all potential 
conflicts of interest and documentation of materiality determinations 
and resolutions of conflicts of interest for a period of 6 years.


Sec. 650.4  Director, officer, employee, and agent responsibilities.

    (a) Each director, officer, employee, and agent of the Corporation 
shall:
    (1) Conduct the business of the Corporation following high 
standards of honesty, integrity, impartiality, loyalty, and care, 
consistent with applicable law and regulation in furtherance of the 
Corporation's public purpose;
    (2) Adhere to the requirements of the conflict-of-interest policy 
established by the Corporation and provide any information the 
Corporation deems necessary to discharge its responsibilities under 
this subpart.
    (b) Directors, officers, employees, and agents of the Corporation 
shall be subject to the penalties of part C of title V of the Farm 
Credit Act of 1971, as amended, for violations of this regulation, 
including failure to adhere to the conflict-of-interest policy 
established by the Corporation.

Subpart B--[Reserved]

    Dated: February 23, 1994.
Curtis M. Anderson,
Secretary, Farm Credit Administration Board.
[FR Doc. 94-4536 Filed 2-28-94; 8:45 am]
BILLING CODE 6705-01-P