[Federal Register Volume 59, Number 92 (Friday, May 13, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-11496]


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[Federal Register: May 13, 1994]


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FARM CREDIT ADMINISTRATION

12 CFR Part 612

RIN 3052-AB47

 

Personnel Administration

AGENCY: Farm Credit Administration.

ACTION: Final rule.

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SUMMARY: The Farm Credit Administration (FCA), by the Farm Credit 
Administration Board (Board), adopts final amendments to the 
regulations relating to standards of conduct for directors and 
employees of Farm Credit System (FCS or System) institutions, excluding 
the Federal Agricultural Mortgage Corporation. This action results from 
a reassessment of the regulations in light of the amendments to the 
Farm Credit Act of 1971 (1971 Act) made by the Agricultural Credit Act 
of 1987 (1987 Act) and the findings of a review required by section 514 
of the Farm Credit Banks and Associations Safety and Soundness Act of 
1992 (1992 Act). The final rule updates the regulations to reflect 
statutory changes and the change in focus of the FCA's regulatory 
oversight of personnel matters. In addition, the final rule enhances 
and clarifies the regulations to ensure that they fulfill the purposes 
of section 514 of the 1992 Act relative to the reporting of financial 
information and potential conflicts of interest.

EFFECTIVE DATE: The regulations shall become effective upon the 
expiration of 30 days after publication during which either or both 
houses of Congress are in session or December 31, 1994, whichever is 
later. Notice of the effective date will be published in the Federal 
Register.

FOR FURTHER INFORMATION CONTACT:

John J. Hays, Policy Analyst, Policy Development and Planning Division, 
Office of Examination, Farm Credit Administration, McLean, VA 22102-
5090, (703) 883-4498, TDD (703) 883-4444,

    or

Dorothy J. Acosta, Assistant General Counsel, Regulatory Operations 
Division, Office of General Counsel, Farm Credit Administration, 
McLean, VA 22102-5090, (703) 883-4020, TDD (703) 883-4444.

SUPPLEMENTARY INFORMATION: On August 19, 1993, the FCA proposed 
amendments to its regulations relating to standards of conduct for 
directors and employees of System institutions. See 58 FR 44139. The 
final regulations retain much of the content of the existing and 
proposed regulations, but strengthen and clarify them, expanding some 
of the provisions and relaxing others.
    The final regulations also address the concerns and suggestions 
received on the proposed regulations during the comment period, which 
expired on September 30, 1993. The FCA received seven comment letters 
on the proposed regulations during the comment period. Three letters 
were submitted by System banks, three by System associations, and one 
by the Farm Credit Council (FCC) on behalf of its member banks and the 
Federal Farm Credit Banks Funding Corporation. These comments and the 
FCA responses are summarized below.
    In addition to comments received during the comment period, three 
letters were received concerning the proposed amendments that have also 
been considered by the FCA Board. Two comment letters pertaining to the 
proposed standards-of-conduct regulations were received pursuant to the 
FCA's request for comments on regulatory burden, published in the 
Federal Register on June 23, 1993. See 58 FR 34003. These comments 
related to reporting requirements and are similar to the comments 
received during the comment period for the proposed regulations. They 
are summarized and addressed in the Board's response to comments 
relating to reporting that were received during the comment period for 
the proposed regulations. One letter was received from an association 
as a followup to a meeting held in Dallas, Texas, between FCA's Board 
and senior management and directors and officers of FCS associations. 
The association expressed a concern regarding the ability to attract 
and retain qualified directors if they are prohibited from purchasing 
acquired property as proposed. The FCA received numerous comments on 
this prohibition and the Board's response appears later in the 
preamble.

General Comments

    Two comments were received concerning the effective date of the 
amendments. The FCC urged the FCA to allow sufficient lead time between 
publication of the final regulations and the effective date to permit 
boards of directors the opportunity to consider carefully the many 
policy judgments that are left to their discretion by the regulations. 
Another comment recommended an effective date no earlier than January 
1, 1995, suggesting that existing regulations and policies would 
continue to provide adequate direction and control in the interim.
    The Board agrees that there should be sufficient lead time to 
revise policies, especially in view of changes made in the final 
regulations in response to comments. Although the final regulations are 
substantially changed from the proposed regulations in response to the 
comments, the Board believes that with the delayed effective date the 
public will have ample opportunity to further review the regulations 
and bring any observations to the Board's attention prior to the 
effective date of the regulations. As always, the Board will consider 
requests for further clarification of or amendments to the regulations 
prior to or after their effective date. Consequently, the Board adopts 
final regulations with a delayed effective date not earlier than 
December 31, 1994.
    One commenter stated that the proposed regulations would result in 
a regulatory burden and that while some improvement in clarity and 
flexibility is offered, the benefits do not appear commensurate with 
the time and cost of implementing the changes. The commenter also 
stated that conflicts of interest have not been improperly or 
inadequately handled and that there is no reason to believe the 
proposed changes will provide any significant improvement in avoiding, 
handling, or reporting conflict-of-interest situations where an 
institution has been complying with the present regulations. According 
to the commenter, the proposed regulations would require substantial 
effort to revamp policies and procedures.
    The FCA Board has not undertaken this revision of the standards-of-
conduct regulations because of improper or inadequate handling or 
reporting of conflicts of interest. Rather, as noted earlier, the 
revision is intended to update the regulations to reflect statutory 
changes and a change in the focus of the FCA's regulatory oversight of 
personnel matters, as well as to respond to section 514 of the 1992 
Act. While the FCA recognizes that the revamping of policies and 
procedures requires substantial effort, the final regulations attempt 
to minimize any burden by providing a delayed effective date. Also, the 
FCA has adjusted the proposed regulations in response to comments where 
it was possible to achieve its objectives by less burdensome means. The 
final regulations place more responsibility on the institutions and 
their officers and directors for identifying possible sources of 
conflict and developing adequate controls, but also offer more 
flexibility for developing procedures that effectively address 
significant conflicts without imposing burdensome requirements that are 
ineffective in preventing conflicts of interest. While this will 
initially require more work, the FCA believes that it is a more 
effective approach to conflicts of interest and that it more 
appropriately reflects the focus of the responsibility for preventing 
conflicts of interest and the role of the FCA as regulator.
    Another commenter supported four of the primary FCA policy 
objectives, namely: (1) Enhancing each association's accountability for 
sound standards-of-conduct programs; (2) maintaining high standards of 
conduct to ensure the proper performance of System business; (3) 
holding directors and employees to the same standard where the 
potential for conflict is the same; and (4) establishing that the 
internal corporate matters of devotion of time to official duties, 
political activity, nepotism, exchange of gifts, and improper use of 
official property are best left to each institution's board of 
directors to oversee through the implementation of a standards-of-
conduct policy. However, the commenter disagreed with the proposed 
strict prohibition of a director purchasing property acquired by the 
institution through foreclosure. The Board's response to this comment 
is addressed in detail later in the preamble.

Section-by-Section Analysis of Comments Received

    The following narrative summarizes the comments received on the 
various sections of the regulations during the comment period, in 
response to the Regulatory Burden Notice, and as a followup to the 
Dallas meeting, and provides the Board's response to those comments.

Section 612.2130--Definitions

    While no comments were received regarding the proposed changes to 
this section, the FCC provided comments on the definitions in the 
existing regulations for ``controlled entity'' and ``officer'' and 
requested the FCA to define the terms ``financially obligated'' and 
``business proprietor'' to clarify how the prohibitions in proposed 
Secs. 612.2140(g) and 612.2150(h) are intended to interface.
    The FCC recommended changing the definition of ``controlled 
entity'' to one similar to that used in the attribution rules of the 
lending limit regulations. See 12 CFR 614.4358(a)(3). Specifically, 
this would increase the 5-percent threshold for control in existing 
regulations to a 50-percent threshold. The FCC believes that 5-percent 
ownership is a very stringent and perhaps unrealistic test of control, 
and that the term ``controlling influence,'' without a higher threshold 
is perhaps too vague to be meaningful.
    The Board does not believe that the definition of control in the 
lending limit regulations is an appropriate definition for standards-
of-conduct regulations. The purpose of the definition of control in the 
lending limit regulations is to identify when borrowers are so related 
that they should be regarded as a single credit risk. The purpose of 
the definition of control in the standards-of- conduct regulations is 
to identify when an interest is so significant that if an individual 
were to act on a matter concerning the related party, there would be an 
appearance of a conflict of interest. Consequently, the FCA believes 
that the control threshold for standards of conduct should be much 
lower than the control threshold for the purposes of lending limits. 
Control thresholds used in regulations directed at conflicts of 
interest are typically much lower. For example, the Securities and 
Exchange Commission requires disclosure of certain transactions with 
the institution of individuals owning 5 percent or more of a class of 
the institution's stock. The Comptroller of the Currency, the Federal 
Deposit Insurance Corporation, and the Office of Thrift Supervision 
have similar requirements for institutions they regulate that are 
public companies required to register under the Securities Exchange Act 
of 1934. The Comptroller imposes similar disclosure requirements on all 
national banks when they sell their securities, whether or not they are 
public companies. The phrase ``exercises a controlling influence'' is 
intended as a catch-all to capture those situations in which a person 
does not meet the objective control tests, but for some other reason 
has the power to control the management of the entity's policies. This 
term is a common component of control definitions and has long been a 
component of the part 612 definition of control without causing a 
particular problem. The definition is used to determine when a director 
or officer must recuse him or herself and in the reporting provisions, 
both of which are direct responsibilities of directors and employees. 
Such persons are likely to know when they are in a position to control 
management of the entity's policies, and, if in doubt, should err on 
the side of recusal and reporting. For the reasons stated above, no 
change has been made to the definition of ``controlled entity.''
    The FCC suggested that the position of chief executive officer be 
added to the definition of ``officer'' since a number of System 
institutions have both a president and a chief executive officer, or a 
chief executive officer rather than a president. The Board adopts this 
suggestion and also adds specific references to chief operating 
officers, chief financial officers, and chief credit officers.
    On a related issue, the FCC questioned whether an association's 
contracting with its supervising bank for a Standards of Conduct 
Officer would violate the joint employee provisions of Sec. 612.2157. 
To clarify that it would not, unless the person otherwise satisfies the 
definition in Sec. 612.2130(m), the term ``Standards of Conduct 
Officer'' is changed to the ``Standards of Conduct Official'' in the 
final regulations.
    The FCC recommended that the term ``financially obligated'' be 
defined, and that prohibited ``financially obligated'' transactions be 
more clearly distinguished from business relationships that are 
permissible.
    The final regulations define ``financially obligated with'' to mean 
having a joint legally enforceable obligation with, being financially 
obligated on behalf of (contingently or otherwise), having an 
enforceable legal obligation secured by a property owned by another, or 
owning property that secures an enforceable legal obligation of 
another. The Board's revision to Secs. 612.2140(g) and 612.2150(h) 
responds to the request to distinguish permissible business 
relationships from prohibited ``financially obligated with'' 
relationships and is discussed below under those sections.
    As a result of this revision, the term ``business proprietor'' is 
no longer used in the regulations and its definition has been deleted. 
In addition, to avoid any possible confusion relative to reporting 
requirements, the definition for the term ``business relationship'' or 
``transacts business'' has been deleted in the final rule.
    The definition of ``ordinary course of business'' in the final 
regulations has been added as described in the discussion of 
Sec. 612.2140.
    The definition of ``family'' has been clarified to spell out more 
specifically those persons included under the phrase ``and each person 
having such relationships by marriage.''

Section 612.2135--Director and Employee Responsibilities and Conduct--
Generally

    No comments were received on this section and it is adopted as 
proposed.

Section 612.2140--Directors--Prohibited Conduct

    The Board proposed to adopt some of the specific prohibitions 
applicable to employees and specifically requested comments on whether 
these prohibitions would operate too restrictively on directors. A 
number of comments were received. The majority of commenters opposed 
the proposed prohibition in paragraph (f) of this section concerning a 
director's purchasing property owned by the director's institution or 
an institution it supervises or is supervised by during the preceding 
12 months when such property was acquired through foreclosure or 
similar action. The FCC asserted that a strict prohibition would make 
it more difficult to attract or retain qualified directors and 
suggested that such purchases be permitted on an institution-by-
institution basis depending on whether the institution has adequate 
controls in place to ensure that directors do not receive an advantage 
or favoritism over other prospective purchasers. Other commenters 
suggested that there are less restrictive alternatives available to 
avoid real or apparent conflicts of interest and ensure continued 
public confidence in the System. One alternative offered was a general 
prohibition on acquired property purchases by directors except by 
public auction or open competitive bidding. The commenters also 
disagreed that the potential for conflicts of interest is as great for 
directors as it is for employees.
    After additional consideration of the issues in light of the public 
comments, the Board has concluded that a total prohibition of director 
purchases of acquired property may be overly restrictive. Directors of 
Farm Credit Banks, associations, and certain directors of agricultural 
credit banks, except outside directors, are required to be farmers, 
ranchers, or producers or harvesters of aquatic products, and as such 
may want to acquire additional land that becomes available in their 
communities. Restrictions on their ability to acquire land that becomes 
available for sale from the institution while they are serving as 
director could be a serious disincentive for a successful individual to 
serve as a director. On the other hand, the potential for conflict is 
especially serious where there is strong motivation for acquiring 
property owned by the institution. Therefore, it is important that 
there be adequate controls in place to ensure that the director's 
impartiality is not impaired and that the director does not use his or 
her position to gain some advantage in acquiring property. The final 
regulations do not prohibit such acquisitions, but require that the 
property be purchased at public auctions or in open competitive 
bidding. In addition, to avoid the appearance of conflict, it is 
important that a director interested in acquiring such property not 
participate in deliberations or decisions concerning foreclosure or 
disposition of that property. Therefore, the final regulations prohibit 
a director from acquiring such property, even through public auction or 
competitive bidding, if he or she has participated in the decision to 
foreclose or dispose of the property or in establishing the terms of 
the sale.
    The FCC recommended that there be an additional exception in 
paragraph (g) of this section under which an otherwise prohibited 
transaction would be permissible if approved by the Standards of 
Conduct Official. Paragraph (g) of the proposed regulations prohibited 
lending transactions between directors and other directors, employees 
or borrowers, but excepts loans between family members, loans made in 
an official capacity, and transactions in the ordinary course of 
business, as defined. The commenter recommended that the suggested 
approval be based upon a determination that the transaction does not 
present any significant risk of impairing the director's (or 
employee's) ability to perform his or her duties with impartiality and 
in compliance with regulations.
    After considering the comment and the likelihood that the 
institutions themselves are in the best position to know what is in the 
ordinary course of business in the local business environment, the 
Board concluded that the suggestion had merit as a substitution for the 
ordinary course of business exception. However, the Board believes that 
there should be a regulatory standard against which such determinations 
can be evaluated that will provide a measure of uniformity among FCS 
institutions. The Board concluded that some relief from the prohibition 
is appropriate when the transaction is so insignificant in amount as 
not to create the appearance of a conflict in the eyes of a reasonable 
person or is an ordinary course of business transaction that is not on 
preferential terms.
    Therefore, in the final regulations the proposed ordinary course of 
business exception has been replaced by a provision that essentially 
allows the Standards of Conduct Officer to grant a waiver where: (1) 
The amount of the transaction is so immaterial that it would not cause 
a reasonable person with knowledge of the relevant facts to question 
the impartiality or objectivity of the director in performing his or 
her official duties; or (2) where the transaction is in the ordinary 
course of business; provided the director recuses him or herself from 
any matter affecting the financial interest of the other party to the 
transaction. ``Ordinary course of business'' is defined to mean a 
transaction with a person who is in the business of offering the goods 
or services that are the subject of the transaction on terms that are 
not preferential or a transaction between two persons who are in 
business together that is incident to the business they conduct 
together. A ``preferential'' transaction is one that is not on the same 
terms as those available for comparable transactions with other persons 
who are not officers and directors of System institutions. The Standard 
of Conduct Official's determination that either of the circumstances 
warranting an exception exists must be documented and is subject to the 
recordkeeping requirements, unless the transaction falls within any 
materiality thresholds for various types of transactions or specific 
ordinary course of business guidelines established by the Board's 
standards-of-conduct policy. While not applicable, the Uniform 
Standards of Ethical Conduct for Executive Branch Employees may be 
useful as a resource in determining such policy guidelines.
    The Board believes that this change responds to the FCC's concern 
that a deferral of payment may be construed as a loan and the concern 
that the exclusion in the proposed regulation may fail to reach 
transactions between an elected director (or employee) who is a 
borrower and an institution's outside director.
    The FCC recommended that the FCA explain its rationale for 
prohibiting employees from being financially obligated with directors, 
other employees, and borrowers, but having no similar prohibition for 
directors.
    The FCA believes there is a greater potential for conflict for 
employees in having these types of relationships with borrowers because 
employees are in a position to have a more direct influence on the 
institution's dealings with the borrower. Also, since directors (except 
outside directors) are statutorily required to be borrower/
stockholders, such a restriction could constitute an inappropriate 
restraint on the ability of directors to pursue their primary 
occupation. However, in light of the greater flexibility granted in the 
final regulation to define an exception to the prohibition on lending 
transactions, the Board believes that the institution can make 
appropriate distinctions in its policies to reflect the greater 
potential for conflict among employees and the impact of the 
prohibition on the ability of the director to pursue his or her primary 
occupation. Therefore, the final regulations make the prohibition for 
directors congruent with the employee prohibition by including 
``financially obligated with'' transactions within the scope of the 
prohibition. See Sec. 612.2150 for discussion of the comments on this 
prohibition for employees. In addition, the final regulation expands 
the family loan transaction exception to include any person residing in 
the director's household and relies on recusal to prevent conflicts of 
interest. Accordingly, the recusal provision in Sec. 612.2140(a) is 
expanded to include any person residing in the director's household and 
to include a specific reference to business partners.

Section 612.2145--Director Reporting

    The FCC believes the requirement to disclose the name of any 
relative or entity controlled by a relative that transacts business 
with the institution or an institution supervised by the institution is 
overly broad. The FCC suggested that the definition of ``relative,'' 
for purposes of disclosure under Secs. 612.2145(b)(1) and 
612.2155(b)(1), be limited to immediate family members as defined in 
part 620 of this chapter. Section 620.1(e) of this chapter defines 
``immediate family member'' to mean spouse, parents, siblings, 
children, mothers- and fathers-in-law, brothers- and sisters-in-law, 
and sons- and daughters-in-law. In addition, the FCC commented that it 
is extremely difficult for a director to disclose a list of borrowers 
with whom the director or the director's entity transacts business, 
since if the director is not involved in the day-to-day operations of 
the business, he or she will have little or no knowledge of the people 
who conduct business with the director's entity. Also, a director may 
not know that the individual or entity is a borrower. The FCC assumed 
that this was not the intention of Sec. 612.2145 and that the 
requirement to disclose ``to the best of his or her knowledge after 
reasonable inquiry'' was designed to address this problem. However, the 
FCC recommended that the requirement of ``reasonable inquiry'' be 
deleted, noting that it is difficult to know what reasonable inquiry is 
in any particular case. The FCC also suggested that directors be 
required to disclose only those business relationships with borrowers 
that are other than ordinary course of business relationships, 
unusually large transactions, ongoing contractual relationships, or 
transactions with nonstandard terms and conditions, or terms other than 
those arrived at through arm's-length negotiations. The FCC argued that 
any appearance of conflict would be eliminated by the knowledge that 
neither the director nor the borrower received special terms. The FCC 
also recommended that each institution be allowed the opportunity to 
define transactions other than in the ordinary course of business 
within the above parameters. The FCC also commented that it is 
difficult to understand how a director's position can be compromised by 
the mere fact that a borrower does business with the director or an 
entity owned by the director.
    Some of the FCC's comments appear to reflect a misunderstanding of 
the requirements of both proposed and existing regulations. Neither the 
proposed regulations nor existing regulations require the reporting of 
transactions with borrowers. The proposed regulations merely require 
the disclosure of the name of any relative or any entity in which the 
director has a financial interest if the relative or entity transacts 
business with borrowers. Transacting business with borrowers is the 
standard that narrows the class of persons or entities a director must 
report. An institution could, for instance, require instead the 
reporting of the names of all entities in which a director or employee 
has a financial interest, irrespective of whether such entities 
transact business with borrowers. Such a requirement would require more 
reporting, but might be easier for the individuals required to report. 
The regulatory requirement is a minimum requirement. The FCA encourages 
boards to require sufficient reporting to permit adequate monitoring of 
potential conflicts.
    After considering the comments on the reporting requirements, the 
final regulations have been modified in several ways in response to 
revisions to the prohibited conduct sections and in an effort to ease 
any unnecessary burden the proposed regulations might have entailed. 
The final regulations permit the institution greater flexibility to 
determine the applicability of the prohibition on lending transactions 
among directors, employees, and borrowers and relies more heavily on 
recusal as a means of resolving conflicts of interest than the existing 
regulations or the proposed regulations. Since the FCA believes that 
the reporting requirements should provide the institution sufficient 
information for the institution to determine when recusal rather than 
prohibition is appropriate, an effort has been made to make the 
reporting requirements parallel the recusal provisions.
    The final regulations do not narrow the definition of ``relative'' 
as suggested. To do so would narrow the scope of the exception from the 
lending and borrowing prohibition and the reach of the recusal 
provision. The suggested narrowing would have deleted ``aunts, uncles, 
nephews, nieces, and grandchildren,'' and these relationships are often 
close enough that it would be unreasonable to restrict borrowing and 
lending between family members when such family members are borrowers. 
Similarly, these relationships are often close enough that it is not 
unreasonable to require recusal from matters affecting their interests. 
However, the standard for reporting the names of relatives in the final 
regulations is whether the individual ``knows or has reason to know'' 
that a relative or entity transacts business with the institution or a 
supervised institution or a borrower of such institutions. The ``knows 
or has reason to know'' standard is adopted to address concerns that 
``to the best of his or her knowledge after reasonable inquiry'' 
imposes a duty to inquire, the reasonableness of which could lead to 
disputes. The ``knows or has reason to know'' standard is a common 
legal standard that is used to ensure that a person's assertion about 
the state of his or her knowledge can be challenged in circumstances in 
which any reasonable person would be deemed to have knowledge. The 
``actual knowledge'' standard suggested by the FCC is not adopted 
because it does not allow any basis for the FCA to question a 
director's assertion regarding his or her subjective state of mind even 
in the most obvious circumstances.
    The reporting requirements supporting the disclosure requirements 
of part 620 of this chapter have been more narrowly focused in the 
final regulations on information needed by the institution to make 
appropriate disclosures under part 620 of this chapter, and more 
clearly specify the information required to be reported. In addition, 
the final regulations also permit greater flexibility in determining 
the frequency of reporting for matters required to be reported, other 
than matters that are required to be reported for part 620 of this 
chapter.
    The FCC also recommended that the reporting requirement for a 
director or employee who becomes or plans to become involved in any 
relationship, transaction, or activity that is required to be reported 
or could constitute a conflict of interest be expanded to require the 
Standards of Conduct Official to determine whether such involvement is, 
in fact, a conflict of interest. The Board has adopted the FCC's 
suggestion in the final regulations and has also added a requirement 
that the determination specify what controls, such as recusal, are 
necessary to ensure that the appearance of conflict is minimized.
    A commenter noted that the proposed requirement that all new 
directors report all matters listed in the director reporting section 
within 1 month after election or appointment perpetuates the present 
reporting redundancy involving a director candidate's disclosure. In 
response to this concern, the final regulations require reporting only 
if no disclosure was made as a director candidate under part 620 of 
this chapter within the preceding 180 days, as this would be considered 
sufficient disclosure.

Section 612.2150--Employees--Prohibited Conduct

    Comments were received from the FCC regarding the prohibition 
against employees borrowing from, lending to, or becoming financially 
obligated with or on behalf of a director, employee, or agent of the 
employing, supervising, or a supervised institution or a borrower or 
loan applicant of the employing institution. The FCA also considered 
the appropriateness of the FCC's comments on the parallel director 
prohibition for the employee prohibition. The FCC recommended that 
there be an additional exception under which an otherwise prohibited 
transaction would be permissible if approved by the Standards of 
Conduct Official after a determination that the transaction does not 
present any significant risk of impairing the director's or employee's 
ability to perform his or her duties with impartiality and in 
compliance with the regulations.
    The FCA concluded that the same modification that was made to 
Sec. 612.2140(g) should be made to the employee prohibition. See 
discussion above.
    Both banks that commented objected to the relaxation of the 
prohibition in Sec. 612.2150(j) against employees acting as real estate 
agents or brokers because of a strong potential for creating conflicts 
of interest, especially for staff appraisers. In addition, one 
commenter observed that such a relaxation would be inconsistent with 
the functional independence required by FCA appraisal regulations. 
Another commenter asserted that the phrase ``for the employee's own 
account'' is unclear and suggested substituting ``intended for the 
employee's own or immediate family use.''
    In view of the commenters' concerns and assurance that the 
prohibition is not a particularly burdensome requirement for staff 
appraisers, the FCA has decided not to adopt the appraiser exception at 
this time. In addition, the final regulations substitute ``intended for 
the use of the employee, a member of the employee's family, or a person 
residing in the employee's household'' for ``for the employee's own 
account,'' to clarify that the latter term was not intended to permit 
an employee to act as an agent or broker for commercial purposes.

Section 612.2155--Employee Reporting

    The FCC commented that the scope and frequency of reports required 
by Sec. 612.2155 are unwarranted, unduly burdensome, and unduly costly 
below the senior officer level. The FCC recommended that the FCA 
distinguish between senior officers and other employees in the 
reporting requirements. The FCC stated that, in its judgment, reports 
by non-senior officers when hired and biennially thereafter are fully 
adequate, especially since employees are required to report covered 
activities as they occur in the interim. They also recommended that the 
FCA remove the specific reporting requirements and require institutions 
to establish reporting procedures to ensure that relationships and 
activities subject to the regulations are properly disclosed and acted 
upon.
    The FCC commented on proposed paragraph (b)(1) of this section, 
which requires employees to file an annual statement disclosing the 
name of any relative or entity controlled by relatives that transact 
business with the institution or any institution supervised by the 
institution. The concern raised was that the disclosure is to be based 
not only on actual knowledge, but also upon reasonable inquiry. This 
was considered to be unreasonably broad in view of the definition of 
``relative,'' because many such relatives may be virtual strangers to 
the employee in question and it is difficult to know what reasonable 
inquiry is in any particular case. The FCC also suggested that 
``relative'' for purposes of disclosure be limited to immediate family 
members, as defined in Sec. 620.1(e) of this chapter.
    The same modifications that were made to the director reporting 
sections have been made to the employee reporting sections in the final 
regulations. Part 620 reporting requirements are focused on matters not 
already within the institution's knowledge and specifically restricted 
to employees who are subject to disclosure requirements, namely senior 
officers, as defined in part 620 of this chapter. The final regulations 
allow the institution to determine employee reporting frequency for 
matters not required for part 620 disclosures, but the institution must 
establish reporting requirements sufficient to permit the effective 
enforcement of the regulations and the standards-of-conduct policy. 
This will allow institutions to exclude certain individuals or classes 
of individuals from the reporting requirement based on the functions 
the employee performs. For instance, positions where there is a 
substantial degree of supervision and a low level of responsibility may 
make the reporting requirement unnecessary.
    The FCC commented that it appears Sec. 612.2150(d) prohibits an 
employee from serving as a director of an entity that transacts 
business with the employing or supervised institution, while 
Sec. 612.2155(b)(2) requires an employee to report the name and nature 
of any entity in which the employee has a financial interest or on 
whose board the employee sits, if the entity transacts business with 
the employing institution. The final regulations delete the reference 
to entities on whose board the employee serves in the reporting 
requirement.
    In response to an FCC recommendation on director reporting 
requirements, Sec. 612.2155 is expanded to require the Standards of 
Conduct Official to determine whether any reported transaction or 
activity is, in fact, a conflict of interest and what controls are 
necessary to ensure that there is no appearance of a conflict of 
interest.
    A commenter noted that for new employee reporting requirements it 
is unclear whether 1 month refers to the time an employment offer is 
extended and accepted or 1 month after the employee commences work. The 
final regulations have been revised to make it clear that a newly hired 
employee must report the required matters within 30 days after 
accepting an offer for employment. However, under the final 
regulations, the institution may establish a reasonable period for such 
new employees to terminate such transactions, activities, or 
relationships not to exceed the period provided for existing employees 
to terminate conduct prohibited under the institution's policies.
    The FCA believes that these changes, together with the greater 
flexibility in defining exceptions to prohibited lending and borrowing 
relationships, will enable institutions to fashion standards-of-conduct 
programs that are more focused on areas in which the potential for 
conflict is most significant without imposing ineffective, burdensome, 
and costly reporting requirements.
    Although enhancing the disclosure of financial information and 
reporting of conflicts of interest was the purpose of section 514 of 
the 1992 Act, the experience of the FCA in implementing Uniform 
Standards of Ethical Conduct for Executive Branch Employees is that 
training employees to recognize situations that present conflicts of 
interest is also an effective use of resources to prevent conflicts of 
interest. The FCA strongly encourages each System institution to 
conduct effective periodic training programs to ensure that employees 
are informed of the requirements of the regulations and the 
institution's policies and are sensitive to circumstances that give the 
appearance of a conflict of interest. Although the FCA believes that 
the responsibility to avoid actual or apparent conflicts of interest 
rests primarily with the individual director or employee, the 
institution has a responsibility to develop policies and procedures 
that monitor compliance with the regulation and avoid the appearance of 
conflict. Providing guidance and training concerning appropriate and 
inappropriate behavior is an effective way of achieving that end.

Section 612.2157--Joint Employees

    The FCC questioned the advisability of having the supervising 
bank's Standards of Conduct Officer contract with an association in the 
district to comply with these requirements on behalf of the association 
and be accountable to the association's board. The FCC stated that it 
is not clear whether this arrangement is possible since the Standards 
of Conduct Officer is an officer of the bank as defined in 
Sec. 612.2130(m).
    The Standards of Conduct Officer does not come within the 
definition of ``officer'' in Sec. 612.2130(m), unless the individual 
designated to perform the duties of the Standards of Conduct Officer 
satisfies the definition because of other duties. Therefore, for 
clarity, the position is referred to in the final regulations as the 
``Standards of Conduct Official'' rather than ``Standard of Conduct 
Officer,'' but in no way is this action intended to diminish the 
importance of the position. In addition, the final regulations do not 
require an association to contract with the bank's Standards of Conduct 
Official. An association may contract with the bank for these services 
to be performed by an individual whom the bank has designated as the 
bank's Standards of Conduct Official. The final regulations also 
include reference to an agricultural credit bank in addition to a Farm 
Credit Bank to provide for the situation in which an association is 
supervised by such a bank.

Section 612.2160--Institution Responsibilities

    No comments were received on this new section and it is adopted as 
proposed.

Section 612.2165--Policies and Procedures

    The FCC suggested that the regulations require an institution to 
provide a reasonable period of time for new directors and new employees 
to terminate transactions, relationships, and activities that are 
prohibited by the regulations and the institution's standards-of-
conduct policies. The Board agrees with this suggestion and adds a new 
paragraph (b)(9) requiring a System institution to provide a reasonable 
period of time for new directors and new employees to terminate 
transactions, relationships, and activities that are prohibited. The 
purpose of this revision is to clarify that a new director or employee 
involved in a prohibited transaction prior to election or hiring is not 
prohibited from accepting the position. However, such persons are 
required to terminate any transactions subject to prohibitions within 
such time period as established by institution policy, beginning with 
the commencement of official duties, except that such period may not 
exceed the period established for existing directors and employees to 
terminate transactions, relationships, or activities prohibited by the 
institution's policies.

Section 612.2170--Standards of Conduct Official

    In addition to changing ``Officer'' to ``Official,'' as discussed 
above, the final regulations add a requirement that records be 
maintained for all determinations made by the Standards of Conduct 
Official and for resolution of each case reported pursuant to this 
part. Also, the office within the FCA designated to receive reports 
under part 612 is changed to the Office of General Counsel, which also 
receives reports relative to part 617 of this chapter.

Section 612.2180--Enforcement

    No comments were received on the proposed amendments and these 
actions are adopted as proposed.

Sections 612.2190 Through 612.2250

    The sections regarding devotion of time to official duties, 
political activity, nepotism, gifts or favors, and improper use of 
official property are removed as proposed and the topics are required 
to be addressed in the institution's policy established pursuant to 
Sec. 612.2165. No comments were received regarding the removal of these 
sections.

Section 612.2260--Standards of Conduct for Agents

    No comments were received regarding this section and it is adopted 
as proposed.

Section 612.2270--Prohibited Purchase of System Obligations

    One commenter questioned the prohibition in existing regulations on 
bank presidents' purchasing obligations of the Farm Credit banks and 
the proposed extension of this prohibition to all employees who may 
participate in any manner in funding activities of their institution. 
The Board concurs that the potential for conflict in a director's or 
employee's purchase of System obligations that are available for 
purchase by the general public through members of the selling group or 
in the secondary market is small. Therefore, the final regulations 
permit such purchases under the conditions listed in Sec. 612.2270.

List of Subjects in 12 CFR Part 612

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

    For the reasons stated in the preamble, part 612 of chapter VI, 
title 12 of the Code of Federal Regulations is revised to read as 
follows:

PART 612--STANDARDS OF CONDUCT

Sec.
612.2130  Definitions.
612.2135  Director and employee responsibilities and conduct--
generally.
612.2140  Directors--prohibited conduct.
612.2145  Director reporting.
612.2150  Employees--prohibited conduct.
612.2155  Employee reporting.
612.2157  Joint employees.
612.2160  Institution responsibilities.
612.2165  Policies and procedures.
612.2170  Standards of Conduct Official.
612.2260  Standards of conduct for agents.
612.2270  Purchase of System obligations.

    Authority: Secs. 5.9, 5.17, 5.19 of the Farm Credit Act (12 
U.S.C. 2243, 2252, 2254).


Sec. 612.2130  Definitions.

    For purposes of this part, the following terms are defined:
    (a) Agent means any person, other than a director or employee, who 
represents a System institution in contacts with third parties or who 
provides professional services to a System institution, such as legal, 
accounting, appraisal, and other similar services.
    (b) A conflict of interest or the appearance thereof exists when a 
person has a financial interest in a transaction, relationship, or 
activity that actually affects or has the appearance of affecting the 
person's ability to perform official duties and responsibilities in a 
totally impartial manner and in the best interest of the employing 
institution when viewed from the perspective of a reasonable person 
with knowledge of the relevant facts.
    (c) Controlled entity and entity controlled by mean an entity in 
which the individual, directly or indirectly, or acting through or in 
concert with one or more persons:
    (1) Owns 5 percent or more of the equity;
    (2) Owns, controls, or has the power to vote 5 percent or more of 
any class of voting securities; or
    (3) Has the power to exercise a controlling influence over the 
management of policies of such entity.
    (d) Director means a member of a board of directors.
    (e) Employee means any salaried officer or part-time, full-time, or 
temporary salaried employee.
    (f) 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, except System institutions.
    (g) Family means an individual and spouse and anyone having the 
following relationship to either: parents, spouse, son, daughter, 
sibling, stepparent, stepson, stepdaughter, stepbrother, stepsister, 
half brother, half sister, uncle, aunt, nephew, niece, grandparent, 
grandson, granddaughter, and the spouses of the foregoing.
    (h) Financial interest means an interest in an activity, 
transaction, property, or relationship with a person or an entity that 
involves receiving or providing something of monetary value or other 
present or deferred compensation.
    (i) Financially obligated with means having a joint legally 
enforceable obligation with, being financially obligated on behalf of 
(contingently or otherwise), having an enforceable legal obligation 
secured by property owned by another, or owning property that secures 
an enforceable legal obligation of another.
    (j) Material, when applied to a financial interest or transaction 
or series of transactions, means that the interest or transaction or 
series of transactions is of such magnitude that a reasonable person 
with knowledge of the relevant facts would question the ability of the 
person who has the interest or is party to such transaction(s) to 
perform his or her official duties objectively and impartially and in 
the best interest of the institution and its statutory purpose.
    (k) Mineral interest means any interest in minerals, oil, or gas, 
including, but not limited to, any right derived directly or indirectly 
from a mineral, oil, or gas lease, deed, or royalty conveyance.
    (l) OFI means other financing institutions that have established an 
access relationship with a Farm Credit Bank or an agricultural credit 
bank under section 1.7(b)(1)(B) of the Act.
    (m) Officer means the chief executive officer, president, chief 
operating officer, vice president, secretary, treasurer, general 
counsel, chief financial officer, and chief credit officer of each 
System institution, and any person not so designated who holds a 
similar position of authority.
    (n) Ordinary course of business, when applied to a transaction, 
means: (1) A transaction that is usual and customary between two 
persons who are in business together; or
    (2) A transaction with a person who is in the business of offering 
the goods or services that are the subject of the transaction on terms 
that are not preferential. Preferential means that the transaction is 
not on the same terms as those prevailing at the same time for 
comparable transactions for other persons who are not directors or 
employees of a System institution.
    (o) Person means individual or entity.
    (p) Relative means any member of the family as defined in paragraph 
(g) of this section.
    (q) Service organization means each service organization authorized 
by section 4.25 of the Act, and each unincorporated service 
organization formed by one or more System institutions.
    (r) Standards of Conduct Official means the official designated 
under Sec. 612.2170 of these regulations.
    (s) Supervised institution is a term which only applies within the 
context of a System bank or an employee of a System bank and refers to 
each association supervised by that bank.
    (t) Supervising institution is a term that only applies within the 
context of an association or an employee of an association and refers 
to the bank that supervises that association.
    (u) System institution and institution mean any bank, association, 
or service organization in the Farm Credit System, including the Farm 
Credit Banks, banks for cooperatives, agricultural credit banks, 
Federal land bank associations, agricultural credit associations, 
Federal land credit associations, production credit associations, the 
Federal Farm Credit Banks Funding Corporation, and service 
organizations.


Sec. 612.2135  Director and employee responsibilities and conduct--
generally.

    (a) Directors and employees of all System institutions shall 
maintain high standards of industry, honesty, integrity, impartiality, 
and conduct in order to ensure the proper performance of System 
business and continued public confidence in the System and each of its 
institutions. The avoidance of misconduct and conflicts of interest is 
indispensable to the maintenance of these standards.
    (b) To achieve these high standards of conduct, directors and 
employees shall observe, to the best of their abilities, the letter and 
intent of all applicable local, state, and Federal laws and regulations 
and policy statements, instructions, and procedures of the Farm Credit 
Administration and System institutions and shall exercise diligence and 
good judgment in carrying out their duties, obligations, and 
responsibilities.


Sec. 612.2140  Directors--prohibited conduct.

    A director of a System institution shall not:
    (a) Participate, directly or indirectly, in deliberations on, or 
the determination of, any matter affecting, directly or indirectly, the 
financial interest of the director, any relative of the director, any 
person residing in the director's household, any business partner of 
the director, or any entity controlled by the director or such persons 
(alone or in concert), except those matters of general applicability 
that affect all shareholders/borrowers in a nondiscriminatory way, 
e.g., a determination of interest rates.
    (b) Divulge or make use of, except in the performance of official 
duties, any fact, information, or document not generally available to 
the public that is acquired by virtue of serving on the board of a 
System institution.
    (c) Use the director's position to obtain or attempt to obtain 
special advantage or favoritism for the director, any relative of the 
director, any person residing in the director's household, any business 
partner of the director, any entity controlled by the director or such 
persons (alone or in concert), any other System institution, or any 
person transacting business with the institution, including borrowers 
and loan applicants.
    (d) Use the director's position or information acquired in 
connection with the director's position to solicit or obtain, directly 
or indirectly, any gift, fee, or other present or deferred compensation 
or for any other personal benefit on behalf of the director, any 
relative of the director, any person residing in the director's 
household, any business partner of the director, any entity controlled 
by the director or such persons (alone or in concert), any other System 
institution, or any person transacting business with the institution, 
including borrowers and loan applicants.
    (e) Accept, directly or indirectly, any gift, fee, or other present 
or deferred compensation that is offered or could reasonably be viewed 
as being offered to influence official action or to obtain information 
that the director has access to by reason of serving on the board of a 
System institution.
    (f) Knowingly acquire, directly or indirectly, except by 
inheritance or through public auction or open competitive bidding 
available to the general public, any interest in any real or personal 
property, including mineral interests, that was owned by the employing, 
supervising, or any supervised institution within the preceding 12 
months and that had been acquired by any such institution as a result 
of foreclosure or similar action; provided, however, a director shall 
not acquire any such interest in real or personal property if he or she 
participated in the deliberations or decision to foreclose or to 
dispose of the property or in establishing the terms of the sale.
    (g) Directly or indirectly borrow from, lend to, or become 
financially obligated with or on behalf of a director, employee, or 
agent of the employing, supervising, or a supervised institution or a 
borrower or loan applicant of the employing institution, unless:
    (1) The transaction is with a relative or any person residing in 
the director's household;
    (2) The transaction is undertaken in an official capacity in 
connection with the institution's discounting, lending, or 
participation relationships with OFIs and other lenders; or
    (3) The Standards of Conduct Official determines, pursuant to 
policies and procedures adopted by the board, that the potential for 
conflict is insignificant because the transaction is in the ordinary 
course of business or is not material in amount and the director does 
not participate in the determination of any matter affecting the 
financial interests of the other party to the transaction except those 
matters affecting all shareholders/borrowers in a nondiscriminatory 
way.
    (h) Violate an institution's policies and procedures governing 
standards of conduct.


Sec. 612.2145  Director reporting.

    (a) Annually, as of the institution's fiscal year end, and at such 
other times as may be required to comply with paragraph (c) of this 
section, each director shall file a written and signed statement with 
the Standards of Conduct Official that fully discloses:
    (1) The names of any immediate family members as defined in 
Sec. 620.1(e) of this chapter, or affiliated organizations, as defined 
in Sec. 620.1(a) of this chapter, who had transactions with the 
institution at any time during the year;
    (2) Any matter required to be disclosed by Sec. 620.5(k) of this 
chapter; and
    (3) Any additional information the institution may require to make 
the disclosures required by part 620 of this chapter.
    (b) Each director shall, at such intervals as the institution's 
board shall determine is necessary to effectively enforce this 
regulation and the institution's standards-of-conduct policy adopted 
pursuant to Sec. 612.2165, file a written and signed statement with the 
Standards of Conduct Official that contains those disclosures required 
by the regulations and such policy. At a minimum, these requirements 
shall include:
    (1) The name of any relative or any person residing in the 
director's household, business partner, or any entity controlled by the 
director or such persons (alone or in concert) if the director knows or 
has reason to know that such individual or entity transacts business 
with the institution or any institution supervised by the director's 
institution; and
    (2) The name and the nature of the business of any entity in which 
the director has a material financial interest or on whose board the 
director sits if the director knows or has reason to know that such 
entity transacts business with: (i) The director's institution or any 
institution supervised by the director's institution; or
    (ii) A borrower of the director's institution or any institution 
supervised by the director's institution.
    (c) Any director who becomes or plans to become involved in any 
relationship, transaction, or activity that is required to be reported 
under this section or could constitute a conflict of interest shall 
promptly report such involvement in writing to the Standards of Conduct 
Official for a determination of whether the relationship, transaction, 
or activity is, in fact, a conflict of interest.
    (d) Unless a disclosure as a director candidate under part 620 of 
this chapter has been made within the preceding 180 days, a newly 
elected or appointed director shall report matters required to be 
reported in paragraphs (a), (b), and (c) of this section to the 
Standards of Conduct Official within 30 days after the election or 
appointment and thereafter shall comply with the requirements of this 
section.


Sec. 612.2150  Employees--prohibited conduct.

    An employee of a System institution shall not:
    (a) Participate, directly or indirectly, in deliberations on, or 
the determination of, any matter affecting, directly or indirectly, the 
financial interest of the employee, any relative of the employee, any 
person residing in the employee's household, any business partner of 
the employee, or any entity controlled by the employee or such persons 
(alone or in concert), except those matters of general applicability 
that affect all shareholders/borrowers in a nondiscriminating way, e.g. 
a determination of interest rates.
    (b) Divulge or make use of, except in the performance of official 
duties, any fact, information, or document not generally available to 
the public that is acquired by virtue of employment with a System 
institution.
    (c) Use the employee's position to obtain or attempt to obtain 
special advantage or favoritism for the employee, any relative of the 
employee, any person residing in the employee's household, any business 
partner of the employee, any entity controlled by the employee or such 
persons (alone or in concert), any other System institution, or any 
person transacting business with the institution, including borrowers 
and loan applicants.
    (d) Serve as an officer or director of an entity that transacts 
business with a System institution in the district or of any commercial 
bank, savings and loan, or other non-System financial institution, 
except employee credit unions. For the purposes of this paragraph, 
``transacts business'' does not include loans by a System institution 
to a family-owned entity, service on the board of directors of the 
Federal Agricultural Mortgage Corporation, or transactions with 
nonprofit entities or entities in which the System institution has an 
ownership interest. With the prior approval of the board of the 
employing institution, an employee of a Farm Credit Bank or association 
may serve as a director of a cooperative that borrows from a bank for 
cooperatives. Prior to approving an employee request, the board shall 
determine whether the employee's proposed service as a director is 
likely to cause the employee to violate any regulations in this part or 
the institution's policies, e.g., the requirements relating to devotion 
of time to official duties.
    (e) Use the employee's position or information acquired in 
connection with the employee's position to solicit or obtain any gift, 
fee, or other present or deferred compensation or for any other 
personal benefit for the employee, any relative of the employee, any 
person residing in the employee's household, any business partner of 
the employee, any entity controlled by the employee or such persons 
(alone or in concert), any other System institution, or any person 
transacting business with the institution, including borrowers and loan 
applicants.
    (f) Accept, directly or indirectly, any gift, fee, or other present 
or deferred compensation that is offered or could reasonably be viewed 
as being offered to influence official action or to obtain information 
the employee has access to by reason of employment with a System 
institution.
    (g) Knowingly acquire, directly or indirectly, except by 
inheritance, any interest in any real or personal property, including 
mineral interests, that was owned by the employing, supervising, or any 
supervised institution within the preceding 12 months and that had been 
acquired by any such institution as a result of foreclosure or similar 
action.
    (h) Directly or indirectly borrow from, lend to, or become 
financially obligated with or on behalf of a director, employee, or 
agent of the employing, supervising, or a supervised institution or a 
borrower or loan applicant of the employing institution, unless: (1) 
The transaction is with a relative or any person residing in the 
employee's household;
    (2) The transaction is undertaken in an official capacity in 
connection with the institution's discounting, lending, or 
participation relationships with OFIs and other lenders; or
    (3) The Standards of Conduct Official determines, pursuant to 
policies and procedures adopted by the board, that the potential for 
conflict is insignificant because the transaction is in the ordinary 
course of business or is not material in amount and the employee does 
not participate in the determination of any matter affecting the 
financial interests of the other party to the transaction except those 
matters affecting all shareholders/borrowers in a nondiscriminatory 
way.
    (i) Violate an institution's policies and procedures governing 
standards of conduct.
    (j) Act as a real estate agent or broker; provided that this 
paragraph shall not apply to transactions involving the purchase or 
sale of real estate intended for the use of the employee, a member of 
the employee's family, or a person residing in the employee's 
household.
    (k) Act as an agent or broker in connection with the sale and 
placement of insurance; provided that this paragraph shall not apply to 
the sale or placement of insurance authorized by section 4.29 of the 
Act.


Sec. 612.2155  Employee reporting.

    (a) Annually, as of the institution's fiscal yearend, and at such 
other times as may be required to comply with paragraph (c) of this 
section, each senior officer, as defined in Sec. 620.1(o) of this 
chapter, shall file a written and signed statement with the Standards 
of Conduct Official that fully discloses:
    (1) The names of any immediate family members, as defined in 
Sec. 620.1(e) of this chapter, or affiliated organizations, as defined 
in Sec. 620.1(a) of this chapter, who had transactions with the 
institution at any time during the year;
    (2) Any matter required to be disclosed by Sec. 620.5(k) of this 
chapter; and
    (3) Any additional information the institution may require to make 
the disclosures required by part 620 of this chapter.
    (b) Each employee shall, at such intervals as the Board shall 
determine necessary to effectively enforce this regulation and the 
institution's standards-of-conduct policy adopted pursuant to 
Sec. 612.2165, file a written and signed statement with the Standards 
of Conduct Official that contains those disclosures required by the 
regulation and such policy. At a minimum, these requirements shall 
include: (1) The name of any relative or any person residing in the 
employee's household, any business partner, or any entity controlled by 
the employee or such persons (alone or in concert) if the employee 
knows or has reason to know that such individual or entity transacts 
business with the employing institution or any institution supervised 
by the employing institution; and
    (2) The name and the nature of the business of any entity in which 
the employee has a material financial interest or on whose board the 
employee sits if the employee knows or has reason to know that such 
entity transacts business with: (i) The employing institution or any 
institution supervised by the employing institution; or
    (ii) A borrower of the employing institution or any institution 
supervised by the employing institution.
    (c) Any employee who becomes or plans to become involved in any 
relationship, transaction, or activity that is required to be reported 
under this section or could constitute a conflict of interest shall 
promptly report such involvement in writing to the Standards of Conduct 
Official for a determination of whether the relationship, transaction, 
or activity is, in fact, a conflict of interest.
    (d) A newly hired employee shall report matters required to be 
reported in paragraphs (a), (b), and (c) of this section to the 
Standards of Conduct Official within 30 days after accepting an offer 
for employment and thereafter shall comply with the requirements of 
this section.


Sec. 612.2157  Joint employees.

    No officer of a Farm Credit Bank or an agricultural credit bank may 
serve as an employee of an association in its district and no employee 
of a Farm Credit Bank or an agricultural credit bank may serve as an 
officer of an association in its district. Farm Credit Bank or 
agricultural credit bank employees other than officers may serve as 
employees other than officers of an association in its district 
provided each institution appropriately reflects the expense of such 
employees in its financial statements.


Sec. 612.2160  Institution responsibilities.

    Each institution shall: (a) Ensure compliance with this part by its 
directors and employees and act promptly to preserve the integrity of 
and public confidence in the institution in any matter involving a 
conflict of interest, whether or not specifically addressed by this 
part or the policies and procedures adopted pursuant to Sec. 612.2165;
    (b) Take appropriate measures to ensure that all directors and 
employees are informed of the requirements of this regulation and 
policies and procedures adopted pursuant to Sec. 612.2165;
    (c) Adopt and implement policies and procedures that will preserve 
the integrity of and public confidence in the institution and the 
System pursuant to Sec. 612.2165;
    (d) Designate a Standards of Conduct Official pursuant to 
Sec. 612.2170; and
    (e) Maintain all standards-of-conduct policies and procedures, 
reports, investigations, determinations, and evidence of compliance 
with this part for a minimum of 6 years.


Sec. 612.2165  Policies and procedures.

    (a) Each institution's board of directors shall issue, consistent 
with this part, policies and procedures governing standards of conduct 
for directors and employees.
    (b) Board policies and procedures issued pursuant to paragraph (a) 
of this section shall reflect due consideration of the potential 
adverse impact of any activities permitted under the policies and shall 
at a minimum: (1) Establish such requirements and prohibitions as are 
necessary to promote public confidence in the institution and the 
System, preserve the integrity and independence of the supervisory 
process, and prevent the improper use of official property, position, 
or information. In developing such requirements and prohibitions, the 
institution shall address such issues as the hiring of relatives, 
political activity, devotion of time to duty, the exchange of gifts and 
favors among directors and employees of the employing, supervising, and 
supervised institution, and the circumstances under which gifts may be 
accepted by directors and employees from outside sources, in light of 
the foregoing objectives;
    (2) Outline authorities and responsibilities of the Standards of 
Conduct Official;
    (3) Establish criteria for business relationships and transactions 
not specifically prohibited by this part between employees or directors 
and borrowers, loan applicants, directors, or employees of the 
employing, supervised, or supervising institutions, or persons 
transacting business with such institutions, including OFIs or other 
lenders having an access or participation relationship;
    (4) Establish criteria under which employees may accept outside 
employment or compensation;
    (5) Establish conditions under which employees may receive loans 
from System institutions;
    (6) Establish conditions under which employees may acquire an 
interest in real or personal property that was mortgaged to a System 
institution at any time within the preceding 12 months;
    (7) Establish conditions under which employees may purchase any 
real or personal property of a System institution acquired by such 
institution for its operations;
    (8) Provide for a reasonable period of time for directors and 
employees to terminate transactions, relationships, or activities that 
are subject to prohibitions that arise at the time of adoption or 
amendment of the policies.
    (9) Require new directors and new employees involved at the time of 
election or hiring in transactions, relationships, and activities 
prohibited by these regulations or internal policies to terminate such 
transactions within the same time period established for existing 
directors or employees pursuant to paragraph (b)(8) of this section, 
beginning with the commencement of official duties, or such shorter 
time period as the institution may establish.
    (10) Establish procedures providing for a director's or employee's 
recusal from official action on any matter in which he or she is 
prohibited from participating under these regulations or the 
institution's policies.
    (11) Establish documentation requirements demonstrating compliance 
with standards-of-conduct decisions and board policy;
    (12) Establish reporting requirements, consistent with this part, 
to enable the institution to comply with Sec. 620.5 of this chapter, 
monitor conflicts of interest, and monitor recusal compliance; and
    (13) Establish appeal procedures available to any employee to whom 
any required approval has been denied.


Sec. 612.2170  Standards of Conduct Official.

    (a) Each institution's board shall designate a Standards of Conduct 
Official who shall: (1) Advise directors, director candidates, and 
employees concerning the provisions of this part;
    (2) Receive reports required by this part;
    (3) Make such determinations as are required by this part;
    (4) Maintain records of actions taken to resolve and/or make 
determinations upon each case reported relative to provisions of this 
part;
    (5) Make appropriate investigations, as directed by the 
institution's board; and
    (6) Report promptly, pursuant to part 617 of this chapter, to the 
institution's board and the Office of General Counsel, Farm Credit 
Administration, all cases where: (i) A preliminary investigation 
indicates that a Federal criminal statute may have been violated;
    (ii) An investigation results in the removal of a director or 
discharge of an employee; or
    (iii) A violation may have an adverse impact on continued public 
confidence in the System or any of its institutions.
    (b) The Standards of Conduct Official shall investigate or cause to 
be investigated all cases involving: (1) Possible violations of 
criminal statutes;
    (2) Possible violations of Secs. 612.2140 and 612.2150, and 
applicable policies and procedures approved under Sec. 612.2165;
    (3) Complaints received against the directors and employees of such 
institution; and
    (4) Possible violations of other provisions of this part or when 
the activities or suspected activities are of a sensitive nature and 
could affect continued public confidence in the Farm Credit System.
    (c) An association board may comply with this section by 
contracting with the Farm Credit Bank or agricultural credit bank in 
its district to provide a Standards of Conduct Official.


Sec. 612.2260  Standards of conduct for agents.

    (a) Agents of System institutions shall maintain high standards of 
honesty, integrity, and impartiality in order to ensure the proper 
performance of System business and continued public confidence in the 
System and all its institutions. The avoidance of misconduct and 
conflicts of interest is indispensable to the maintenance of these 
standards.
    (b) System institutions shall utilize safe and sound business 
practices in the engagement, utilization, and retention of agents. 
These practices shall provide for the selection of qualified and 
reputable agents. Employing System institutions shall be responsible 
for the administration of relationships with their agents, and shall 
take appropriate investigative and corrective action in the case of a 
breach of fiduciary duties by the agent or failure of the agent to 
carry out other agent duties as required by contract, FCA regulations, 
or law.
    (c) System institutions shall be responsible for exercising 
corresponding special diligence and control, through good business 
practices, to avoid or control situations that have inherent potential 
for sensitivity, either real or perceived. These areas include the 
employment of agents who are related to directors or employees of the 
institutions; the solicitation and acceptance of gifts, contributions, 
or special considerations by agents; and the use of System and borrower 
information obtained in the course of the agent's association with 
System institutions.


Sec. 612.2270  Purchase of System obligations.

    (a) Employees and directors of System institutions, other than the 
Federal Farm Credit Banks Funding Corporation, may only purchase joint, 
consolidated, or Systemwide obligations that are:
    (1) Part of an offering available to the general public; and
    (2) Purchased through a dealer or dealer bank affiliated with a 
member of the selling group designated by the Federal Farm Credit Banks 
Funding Corporation or purchased in the secondary market.
    (b) No director or employee of the Federal Farm Credit Banks 
Funding Corporation may purchase or otherwise acquire, directly or 
indirectly, except by inheritance, any joint, consolidated, or 
Systemwide obligation.

    Dated: May 5, 1994.
Nan P. Mitchem,
Acting Secretary, Farm Credit Administration Board.
[FR Doc. 94-11496 Filed 5-12-94; 8:45 am]
BILLING CODE 6705-01-P