[Federal Register Volume 86, Number 174 (Monday, September 13, 2021)]
[Rules and Regulations]
[Pages 50956-50980]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-18432]



[[Page 50955]]

Vol. 86

Monday,

No. 174

September 13, 2021

Part II





Farm Credit Administration





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12 CFR Part 612





Standards of Conduct; Final Rule

  Federal Register / Vol. 86 , No. 174 / Monday, September 13, 2021 / 
Rules and Regulations  

[[Page 50956]]


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FARM CREDIT ADMINISTRATION

12 CFR Part 612

RIN 3052-AC44


Standards of Conduct

AGENCY: Farm Credit Administration.

ACTION: Final rule.

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SUMMARY: The Farm Credit Administration (FCA, we, or our) is amending 
the its regulations governing standards of conduct (SOC) of directors 
and employees of Farm Credit System (System) institutions, excluding 
the Federal Agricultural Mortgage Corporation (Farmer Mac). The final 
rule requires each System institution to have or develop a Standards of 
Conduct Program based on core principles to put into effect ethical 
values as part of its corporate culture.

DATES: This regulation will be effective 30 days after publication in 
the Federal Register during which either or both Houses of Congress are 
in session. Pursuant to 12 U.S.C. 2252(c)(1), we will publish a 
notification of the effective date in the Federal Register.

FOR FURTHER INFORMATION CONTACT: 
    Technical information: Lori Markowitz, Senior Policy Analyst, 
Office of Regulatory Policy, Farm Credit Administration, (703) 883-
4487, TTY (703) 883-4056,[email protected].
    Legal information: Laura McFarland, Senior Counsel, Office of 
General Counsel, Farm Credit Administration, (703) 883-4020, TTY (703) 
883-4056.

SUPPLEMENTARY INFORMATION:

I. Objectives

    The objectives of this final rule are to:
     Establish principles for ethical conduct at System 
institutions;
     Enhance Standards of Conduct Programs using core 
principles;
     Require each System institution to adopt a Code of Ethics; 
and
     Encourage and enhance ethical behavior within the Farm 
Credit System.

II. Background

    The Farm Credit Act of 1971, as amended, (Act) \1\ establishes 
System institutions as federally chartered instrumentalities of the 
United States.\2\ This status confers on System institutions additional 
responsibility to strive for high ethical standards and business 
practices. We believe that public confidence in the integrity and 
ethical business practices of any financial institution is fundamental 
to its ongoing viability. Unethical or preferential business practices 
can damage a financial institution's reputation and lead to earnings 
and credit risk. Further, Congress explained in section 514 of the Farm 
Credit Banks and Associations Safety and Soundness Act of 1992 (1992 
Act) that disclosure of financial information and the reporting of 
potential conflicts of interest by System directors, officers, and 
employees helps enhances the financial integrity of the System.\3\ This 
concept is also reflected in many of the provisions of the Sarbanes-
Oxley Act of 2002.\4\
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    \1\ Public Law 92-181, 85 Stat. 583.
    \2\ See, for example, 12 U.S.C. 2011, 2071, 2091 and 2121.
    \3\ Public Law 102-552, 106 Stat. 4102, 4131.
    \4\ Public Law 107-204, July 30, 2002.
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    We published a proposed rule on June 15, 2018, to update FCA's 
standards of conduct regulations.\5\ The 2018 proposed rule set forth 
core principles that would serve as the foundation for ethical conduct, 
including requiring each System institution to adopt a Code of Ethics 
and address the responsibilities of directors, employees, and Standards 
of Conduct Officials. Our intent in this rulemaking is to provide 
performance criteria in some areas while also setting safe and sound 
operational directions in others to provide for an effective safety and 
soundness framework. The final rule gives full consideration to the 
role our examinations play in ensuring safe and sound operations of the 
System.
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    \5\ 83 FR 27922. We last issued regulations on System standards 
of conduct May 13, 1994 (59 FR 24894).
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    The comment period for the 2018 proposed rule closed September 13, 
2018.

III. Comments and Our Responses

    We received 151 comment letters, all of which came from System 
institutions or persons affiliated with the System. Of the comment 
letters received, one came from the Farm Credit Council (Council) 
acting on behalf of its membership. Each of the four Farm Credit banks 
submitted a letter, with 15 directors or officers from AgFirst FCB also 
submitting letters (herein after collectively referred to as ``FC 
banks''). Additionally, 121 letters came from associations, or 
directors and officers of an association, which represents 34 
associations, and another 10 letters were submitted on behalf of one 
service corporation and two unincorporated business entities. A total 
of 139 comment letters expressed support for the Council's letter, with 
eighty-two stating specific support, among which were the four FC 
banks. Of the comments received from associations and persons or 
entities affiliated with associations, a total of 44 letters stated 
support for the comments coming from the FC banks: 32 expressed support 
for comments made by AgFirst FCB, nine supported comments made by the 
Farm Credit Bank of Texas (FCB of Texas) and three expressed support 
for comments made by CoBank ACB. All 151 comment letters contained 
constructive comments, some supporting portions of the proposed rule, 
but most asking for changes. A few commenters requested we withdraw the 
proposed rule and keep the existing regulations in place. Several 
commenters expressed support for the proposed rule's principles-based 
approach, explaining it allows for greater flexibility.
    In our response to comments we have made some changes on certain 
proposed provisions, including not finalizing some proposed items, and 
have provided explanations to further clarify the final rule, all of 
which are discussed below.

A. General Comments

    The Council and several other commenters complained that the 
proposed changes would be administratively burdensome, require 
revisions of existing policies and procedures, amounting to a needless 
overhaul of existing System institution standards of conduct processes. 
Comments were also made questioning our Regulatory Flexibility Act 
(RFA) analysis and adherence to section 212 of the Farm Credit System 
Reform Act of 1996 (1996 Act).\6\
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    \6\ Public Law 104-105, 110 Stat. 162 (H.R. 2029).
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    We received general comments that the preamble to the proposed rule 
discussed things that the regulatory text did not say. We have 
addressed a few of those comments by moving preamble discussions into 
the relevant provisions in the final rule as clarifying changes, but, 
for the most part, because the intent of this rule is to present 
general parameters for compliance and allow the System institution the 
flexibility to develop a Standards of Conduct Program that best suits 
its own needs, we provide guidance within the preamble without putting 
forth accompanying regulatory requirements.
1. Regulatory Burden and 1996 Act
    Comments were made that the proposed rule presented items that were 
unnecessary, burdensome, or inconsistent with the 1996 Act. Section 
212(b) of the 1996 Act requires us to continuously review our 
regulations to eliminate rules that are unnecessary,

[[Page 50957]]

unduly burdensome, costly, or not based on law. The 1996 Act specifies 
that we are to make these eliminations only if they would be consistent 
with law, safety, and soundness. Congress charged us to issue 
regulations to ensure the safety and soundness of the System. Congress 
explained in section 514 of the 1992 Act that reporting of potential 
conflicts of interest by System directors, officers, and employees 
helps ensure the financial viability of the Farm Credit System. This 
rule is consistent with the law and safety and soundness concerns.
2. Regulatory Flexibility Act (RFA)
    The Council and a couple of others commented that the rule should 
not be exempt from the RFA as our analysis should focus on the 
individual impact of this rulemaking to each System institution and not 
consider financial affiliations between the FC banks and associations. 
Under the RFA, an agency must certify that a rulemaking will not have a 
significant economic impact on a substantial number of small entities. 
If the rulemaking will have such an impact, then the agency must 
conduct a regulatory flexibility analysis. The RFA definition of a 
``small entity'' incorporates the Small Business Administration (SBA) 
definition of a ``small business concern,'' including its size 
standards. A small business concern is one independently owned and 
operated, and not dominant in its field of operation. The SBA explains 
that ``independently owned and operated'' is determined, in part, by 
the entity's affiliation with other businesses. Generally, an affiliate 
is one that is controlled by, or has control over, the entity. 
Businesses with ownership, management, and contractual relationships 
that make them economically dependent may also be affiliates.
    For purposes of the RFA, the interrelated ownership, control, and 
contractual relationship between associations and their funding banks 
are sufficient to permit them to be treated as a single entity. 
Further, System institutions fall under the SBA ``Credit Intermediation 
and Related Activities'' size category for small business concerns and 
the ``All Other Non-Depository Credit Intermediation'' subcategory. 
This subcategory defines a small entity as one with average annual 
assets less than $6 million. As affiliates, the combined average annual 
assets of each Farm Credit bank and its affiliated associations exceed 
$6 million. Therefore, System institutions do not satisfy the RFA 
definition of ``small entities.'' Because System institutions are not 
small entities and the FCA regulations apply only to System operations, 
FCA regulations generally do not and will not have a substantial 
economic impact on small entities.
3. Organization
    We proposed consolidating, renaming and assigning new regulatory 
section numbers to most existing provisions as well as removing other 
sections altogether. The Council and its supporters objected to the 
proposed reorganization of subpart A of part 612, asking us to retain 
existing rule numbering wherever possible. Fourteen commenters found 
the consolidation of director and employee provisions problematic, 
stating the existing separation in the rules makes them well-structured 
and easy to follow. In response to these concerns, we are finalizing 
some, but not all, of our proposed reorganization. Specifically, we are 
finalizing the proposed changes to section headings and the 
consolidation of provisions to remove separate sections on director and 
employee conduct matters. However, we are keeping most existing 
sections numbers for matters covering the same subject matter as what 
was proposed. We are also keeping the separate section for standards of 
conduct for agents but renumbering it as Sec.  612.2180. We discuss 
later in this preamble content changes to the existing provisions on 
agents resulting from our proposals on the issue and comments received.

B. Specific Issues

1. Definitions. [Sec.  612.2130]
    We proposed adding new terms, as well as either removing or 
modifying the meaning of some existing terms used in subpart A of part 
612. Specifically, we proposed as new terms:

 Code of Ethics
 Preferential
 Reportable business entity
 Resolved
 Standards of Conduct Program

We proposed removing the terms ``controlled entity'', ''OFI'', 
``officer'', ``relative'', and ``service corporation'' due to 
redundancy. We also proposed revising the following existing terms:

 Agent
 Conflict of Interest
 Employee
 Entity
 Family
 Financial interest
 Financially obligated
 Material
 Ordinary course of business
 Standards of Conduct Official
 System institution

As proposed, there would be a total of twenty terms in the definition 
section. The final rule contains twenty-one terms in Sec.  612.2130 due 
to keeping the definition of ``officer.''
    We received 129 comment letters on proposed changes to Sec.  
612.2130, including a letter each from the Council and three FC banks. 
Comments were directed at thirteen of the twenty terms contained in 
this section of the proposed rule, plus the removal of the term 
``officer.'' Over half of the commenters objected to the proposed 
changes to the meaning of ``agent'' and ``family.'' One-third of the 
commenters sought changes to the terms ``conflict of interest'', 
``employee'', and ``standards of conduct official.'' Less than a 
quarter of comments were on the term ``reportable business entity''. 
The remaining comments were on the terms: ``entity'', ``ordinary course 
of business'', ``resolved'', ``Code of Ethics'', ``material'', 
``preferential'', and ``standards of conduct program.'' In addition, 
twenty-two commenters, including the Council, CoBank, and FCB of Texas, 
objected to removing the term ``officer.'' Two commenters expressed 
specific support for removing the term ``relative.''
    What follows is a discussion of the comments on the definitions and 
our responses. If a term is not discussed, it is finalized as proposed.
1-a. Agent
    As proposed, changes to the definition of agent would have 
explained that an agent is someone who currently represents the System 
institution as a fiduciary in contacts with third parties, including 
cyber-security and internet technology providers. We received 78 
comments objecting to our proposed changes to this term. The Council 
and many other commenters remarked that the changes expand the 
reporting burden, with some commenters stating that those covered by 
the proposed definition may be prevented by other laws from filing 
conflict reports. Letters from the Council, FCB of Texas and several 
other commenters asked that the definition be confined to the legal 
meaning of ``agent'' where a fiduciary duty is included. Some 
commenters stated that an agent is more than someone with fiduciary 
duties, but also one with power to act for the institution. Some 
commenters remarked that the change was too broad and the term should 
exclude those already bound by a code of professional conduct. One 
commenter said it would be better to ensure those with fiduciary duties 
act in accordance with a Code of Ethics then extend the SOC program by 
changing definition of ``agent.'' Another commenter expressed concern 
with

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liability in trying to control the conduct of third parties. The FCB of 
Texas and one other commenter stated the definition of ``agent'' is a 
longstanding issue and the proposed change does not improve the 
situation. These commenters added that merely adding the word 
`fiduciary' to the definition serves to complicate compliance with 
proposed provisions regarding third party adherence to the standards of 
conduct program. These commenters agreed that using ``fiduciary'' 
clarifies an agent has a legal relationship, but the definition should 
include that the person has agreed to be an agent with fiduciary 
duties.
    The Council, CoBank, FCB of Texas, and several other commenters 
specifically objected to identifying cyber security and information 
technology professionals as agents of a System institution. The 
Council, FCB of Texas and one other commenter stated these persons are 
not members of a profession having a generally recognized code of 
conduct as the other professions listed in the definition (e.g., 
attorney, appraiser, accountant) and some commenters stated that System 
institutions will lose their best contractors. CoBank and several other 
commenters asked that we limit the meaning of agent to the legal 
meaning and manage vendors through contract and institution policies. 
Some commenters expressed concern with including vendors in the term 
``agent'' when they clearly are not agents. FCB of Texas suggested that 
vendors like cyber security and information technology professionals be 
added as a subcategory of third parties subject to the institution's 
conduct policies.
    We note that after issuance of the proposed rule and closure of the 
comment period, the Act was further amended by the Agricultural 
Improvement Act of 2018 (2018 Farm Bill).\7\ Specifically, FCA's 
enforcement authorities were enhanced by adding section 5.31A (12 
U.S.C. 2267a), which gives FCA enforcement jurisdiction over 
``institution-affiliated parties''. The 2018 Farm Bill also modified 
section 5.35 of the Act (12 U.S.C. 2271) to define an ``institution-
affiliated party,'' which definition includes both agents and 
independent contractors of System institutions as well as ``any other 
person, as determined by the Farm Credit Administration (by regulation 
or on a case-by-case basis) who participates in the conduct of the 
affairs of a System institution.''
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    \7\ Public Law 115-334, 132 Stat. 4490.
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    We considered all the comments made on the meaning of ``agent'' and 
the new authorities granted FCA in the 2018 Farm Bill. In general, the 
comments offered three suggestions:

 Keep the existing definition;
 Use the legal definition of ``agent''; or
 Remove vendors from the definition.

In response to commenters, we finalize the rule using all three key 
suggestions in a manner that preserves the policy objectives behind the 
proposed rule. The final rule uses the existing definition of 
``agent'',\8\ but removes references to any particular service being 
provided, and adds language to better reflect the basic legal meaning 
of the term, including fiduciary relationships. As a result, we 
finalize the term ``agent'' to mean any person who is not a director or 
employee of the institution but who has the power to act for the 
institution, by contract or apparent authority, in either a 
representational capacity or through provision of professional or 
fiduciary services.
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    \8\ The existing term is defined as ``any person, other than a 
director or employee, who currently represents a System institution 
in contacts with third parties or who currently provides 
professional services to a System institution, such as legal, 
accounting, appraisal, and other similar services.''
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1-b. Code of Ethics
    A Code of Ethics was proposed to mean a written statement of the 
principles and values the System institution follows to establish a 
culture of ethical conduct for directors and employees. The FCB of 
Texas and a few others asked that Code of Ethics be referred to as 
``code of conduct'' to avoid confusion with the existing financial 
disclosure code of ethics. FCB of Texas also suggested adding 
``including, at a minimum, the core principles set forth in Sec.  
612.2136'' to the definition. We decline to change the name from a Code 
of Ethics and finalize its meaning as proposed, with one change. We 
agree that the Code of Ethics should have a connection to the core 
principles and have included the statement recommended by FCB of Texas.
1-c. Conflict of Interest
    We proposed to define a conflict of interest to mean a set of 
circumstances creating a risk that a secondary or non-work-related 
interest could unduly influence or materially impact a director's or 
employee's decision-making with respect to a primary interest. The 
Council, two FC banks and 32 others commented on this proposed 
definition. The Council, CoBank and some others commented that changes 
to this term are not customary, remarking on the ambiguity of using 
primary and secondary interests in the definition of a conflict of 
interest, with one commenter asking for more specificity. FCB of Texas 
and CoBank asked for explanation of what are primary and secondary 
interests. The Council and some other commenters objected to expanding 
the definition to cover activities which ``could'' materially impact 
someone's objectivity, stating the current scope of actual impact and 
appearance of impact are sufficient. The Council, CoBank and several 
others asked that proposed changes not be made, allowing the existing 
definition to remain. FCB of Texas stated no change to the existing 
definition was needed but offered a new definition it believed 
clarified what interests are primary in nature. FCB of Texas also asked 
that if the term was going to be expanded as proposed, that the 
companion term ``material'' be adjusted as well, and that guidance be 
given on when a set of circumstances would rise to a conflict. FCB of 
Texas also commented that the proposed definition implied that a 
financial interest was not the only circumstance that could give rise 
to a conflict.
    In response to comments, we have made changes to the proposed 
definition of conflict of interest. The final rule keeps the existing 
definition of ``conflicts of interest.'' In regards to the commenters 
who objected to expanding the definition to cover activities which 
``could'' materially impact someone's objectivity, we believe that 
potential conflicts of interest should remain in the definition because 
they can affect or give the appearance of affecting the impartiality of 
the director or employee and as such, need to be reported under Sec.  
612.2145. The final definition provides that a conflict of interest 
includes known circumstances or circumstances that appear to affect a 
person's ability to perform official duties and responsibilities in a 
totally impartial manner due to a financial interest in a transaction, 
relationship, or activity. System institutions should understand that 
the definition's use of a reasonable person's perspective is applied in 
a manner that gives full consideration to the cooperative structure of 
the System.
1-d. Employee
    Changes to the definition of ``employee'' were proposed to ensure 
that everyone working at the System institution, including temporary 
employees, would be part of the ethical corporate culture, regardless 
of length of employment. The Council, two FC banks and twenty-two other 
commenters remarked upon this

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proposal. The Council and some others asked that third-party 
contractors not be considered employees as was stated in the proposed 
rule preamble. The Council, CoBank and a few commenters also asked for 
exemptions to the definition for persons employed only temporarily, 
suggesting a 6-months or less timeframe, to recognize seasonal workers 
and summer interns. FCB of Texas requested that the current definition 
be retained, pointing out the current definition does not include 
contractors. CoBank asked that contractors be removed from the 
definition, stating its inclusion raises employment law issues. A few 
commenters asked that ``employee'' and ``officer'' be kept as separate 
terms since consolidating them creates confusion for training and 
reporting requirements. One commenter asked that the word ``working'' 
be replaced with ``employed'' to avoid including independent 
contractors.
    In the final rule, we adopt the suggestion to replace ``employed'' 
with ``working'' within the definition of ``employee.'' We have also 
modified our proposed definition of ``employee'' in response to 
comments received to clarify the term does not include those persons 
not maintained on the institution's payroll, which we believe would 
include those for whom the institution withholds payroll taxes. In the 
final rule text, we specifically identify that independent contractors 
are not ``employees'' for purposes of the standards of conduct rules. 
Generally, an independent contractor can be identified: (1) By how he 
or she is paid, which distinguishes them from those on the payroll 
(e.g., someone who receives an Internal Revenue Service (IRS) Form 
1099-NEC or similar document from the institution) \9\ and (2) if 
employee-type benefits are provided (i.e., pensions, insurance, 
vacation pay) by the institution. We use the example of payroll versus 
an IRS form only to illustrate what would be a clear indicator of 
employment status, but it will not always be the deciding element. We 
also explain in this preamble that we consider an employee to be a 
person in the service of another under any contract of hire, express or 
implied, oral or written, where the employing institution has the power 
or right to control and direct the employee in the material details of 
how work is to be performed. Conversely, we consider an independent 
contractor to be someone who contracts to do a piece of work according 
to his or her own methods and who is subject to the contracting 
institution's control only as to the end product or final result of 
that work.
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    \9\ IRS Form 1099-NEC is used by payers to report payments made 
in the course of a trade or business to others for services. If you 
paid someone who is not your employee $600 or more for services 
provided during the year, a Form 1099-NEC is issued January 31 of 
the year following payment.
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    We are not exempting seasonal employees as suggested by commenters. 
We believe that temporary employees, including interns, regardless of 
how long employed, may have positions in the institution that put them 
in contact with sensitive information that could be used in misconduct. 
Therefore, we believe temporary and other short-term employees who are 
being paid by the institution should be held to the same standards of 
conduct as full- and part-time employees.
    The proposed rule would have eliminated the definition of 
``officer'' because officers are a type of employee. Commenters asked 
that we retain the part 612 definition of ``officer'' as the term is 
useful in differentiating prohibited actions and reporting requirements 
amongst general employees and those specific to officers. In response 
to this request, we are not removing the definition of ``officer'' as 
was proposed.
1-e. Entity
    The term `sole proprietorship' was proposed as an addition to the 
definition of ``entity''. FCB of Texas and one other commenter asked 
that we remove `sole proprietorships' from the definition as those 
businesses are normally understood to be other than an entity. FCB of 
Texas suggested that we include businesses owned by one or more 
individual in the definition, such as unincorporated business entities, 
limited liability companies, or limited partnerships. The final rule 
addresses these comments by adding explanatory parentheticals for 
`partnerships' and `trusts' and by removing `sole proprietorships' from 
the definition. The explanatory parentheticals address comments on 
capturing unincorporated businesses by explaining a partnership can be 
general or limited and a trust can be formed for business or otherwise. 
Also, the term `sole proprietorships' is moved to the definition of 
``person'' to ensure that type of operation is captured.
1-f. Family
    As proposed, the phrase ``significant other'' would have been added 
to the definition of family. The Council, three FC banks, and 83 other 
commenters remarked on this proposal. The Council, FCB of Texas, three 
commenters from AgFirst FCB, and many other commenters objected to the 
proposed use of ``significant other'' in the definition, with some 
asking for its removal or replacing it with ``civil union partner''. 
Many commenters stated the expanded definition was burdensome for 
reporting purposes and unreasonable because it created the expectation 
that institutions make the determination as to the seriousness of an 
individual's relationship status. CoBank and some other commenters 
asked that the use of ``significant other'' in the definition be 
removed as it is a vague term and several commenters explained that 
there is no common understanding of the phrase. Some commenters 
specifically remarked that ``significant other'' needed to be defined. 
One commenter supported adding ``significant other'' to the definition.
    The Council, CoBank and FCB of Texas suggested that instead of 
quantifying relationships under the definition of ``family'' by using 
specific titles, we should use the description applied in the Standards 
of Conduct regulations for Farmer Mac regarding households and 
financial dependence.\10\ Specifically, they suggested we define 
``family'' as all persons residing in the household or who are 
otherwise legal dependents. The Council and some others also suggested 
keeping the existing Sec.  612.2130 definition of ``family'' as it has 
a clearer means of identifying who is covered by standards of conduct 
requirements. FCB of Texas and two other commenters suggested limiting 
the scope of ``family'' to immediate family as is done under 12 CFR 
part 620 regulations for annual reports. A few commenters agreed it was 
important to include those seen as family but preferred to limit it to 
those living in the household or the immediate family. AgFirst FCB 
observed that the proposed definition of ``family'' does not require a 
legal relationship in all cases.
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    \10\ 12 CFR 651.22.
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    Additionally, the individual commenters from the FC banks and 
several commenters expressed concern with expanding the definition to 
include cousins, as was discussed in the proposed rule preamble. Some 
commenters said that would create a broad burden as there was no 
accompanying limit on if only first cousins were contemplated or more 
lineal remote cousins. These commenters asked that the term not include 
cousins, but if it does, then it should be put in the regulatory text. 
These commenters also asked that if cousins were included, it be 
limited to first cousins and to only those first

[[Page 50960]]

cousins a director or employee has reason to know is conducting 
business with the System.
    The final meaning of ``family'' has been revised from what was 
proposed to incorporate most of the comments received. First, reference 
to significant others has been replaced with a reference to civil union 
partners. Second, cousins have not been added to the definition. Next, 
highly specific relationships are replaced with more gender-neutral 
terms and accompanying language that those terms apply whether the 
relationship arises from biological, adoptive, martial, or other legal 
means. This action also brings the definition closer to that of 
``immediate family'' used in 12 CFR part 620 as requested by some 
commenters. Finally, persons residing in the household or who are 
legal/financial dependents, regardless of familial relationships, have 
been added as requested. This change makes the definition similar to 
the existing Farmer Mac guidance found at Sec.  651.22(a) and 
harmonizes it with other areas of the law.
1-g. Material
    No substantive changes to this definition were proposed. However, 
the FCB of Texas asked that the current definition be retained without 
change. The commenter then suggested that if the intent was to expand 
the definition to include personal interests that the rule clearly 
state that, adding that a parallel change should be made to the 
definition of conflict of interest. The term is finalized as proposed. 
We have not made the suggested changes to the definition as we do not 
believe they are necessary.
    In the preamble to the proposed rule, we discussed that something 
that is material in one context or geographic area may not be material 
in a different context or geographical area. We also discussed our 
expectation that each System institution would develop its own 
guidelines on that which is material, possibly including a dollar 
threshold for what would not be material. We continue to believe the 
System institution board should be accountable for, and involved in 
approving, these guidelines as required in Sec.  612.2137.
1-h. Ordinary Course of Business
    Changes proposed to the definition of ``ordinary course of 
business'' would separate out the existing definition for 
``preferential'' and define ``ordinary course of business'' as:

     A transaction that is usual and customary in the business 
in question on terms that are not preferential, or
     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.

The FCB of Texas and seven others commented on the proposed change to 
the meaning of ``ordinary course of business.'' FCB of Texas asked that 
we keep the current definition because the proposed changes are 
confusing and too subjective for consistent application. The other six 
commenters asked that we keep the current term since the proposed 
changes go beyond what is ordinary, potentially causing common business 
negotiations to be reported to the Standards of Conduct Official 
(SOCO). One commenter asked that we leave the existing term alone, 
stating it does not need to be changed. Another commenter observed that 
there is little meaningful difference between the first and second 
paragraphs of the proposed definition.
    This term is being finalized as proposed. We do not find the 
proposed definition confusing or subjective. The current definition 
applies to transactions that are usual and customary, as does our 
proposed definition. The current definition also applies to 
transactions with a person who is in the business of offering the goods 
or services that are the subject of the transaction, as does our 
proposed definition. Additionally, we do not agree with the commenters' 
concerns regarding the first and second paragraphs. The first paragraph 
applies to a transaction that is usual and customary in a business but 
is not necessarily with a person in that business. The second applies 
to a transaction with a person in the business that is the subject of 
the transaction. In either case, the rule does not allow a director or 
employee to trade on their position within the System institution to 
get a special deal or preferential treatment for goods and services.
1-i. Preferential
    In the proposed rule, the definition of ``preferential'' currently 
contained within the definition for ``ordinary course of business'' 
would be a separate term. Only the FCB of Texas commented on the 
proposed change, suggesting we include a reference to the institution's 
policies and procedures in the regulatory definition of preferential. 
This term is being finalized as proposed. Although we decline the 
suggestion to add a reference to institution policies and procedures 
because we believe the addition would be overly prescriptive, a System 
institution can include a discussion of preferential in its SOC program 
policies and procedures for business transactions.
1-j. Reportable Business Entity
    We proposed changing the term ``controlled entity'' to ``reportable 
business entity'', defining it as an entity in which a person owns, 
controls, or has power to vote a material percentage of the equity. The 
intent behind this proposed change was to avoid confusion with the term 
`control' in the corporate context, and to allow the System institution 
discretion to determine when an interest in a business entity may 
present a conflict and therefore should be reported to the institution.
    The Council, two FC banks and 15 other commenters remarked on this 
proposal. The Council, CoBank and one other commenter stated the 
revisions to this definition do not align clearly with how ``affiliated 
organizations'' is used in 12 CFR part 620. The Council pointed out 
that the part 620 disclosures for some directors and senior officers 
are taken directly from standards of conduct reports and it is 
difficult to understand how the two sets of regulations will work 
together with the new term ``reportable entity'' only used in one of 
the rules. The Council asked for the two rules to be reconciled or that 
FCA otherwise state if the proposed change in part 612 means a separate 
process for part 620 disclosures is now expected. FCB of Texas said the 
proposed definition is an improvement over ``controlled entity'' but 
disagrees with replacing the 5% ownership threshold with the less 
specific ``material percentage'' language. The FCB of Texas also 
remarked that it was unreasonable to ask an institution's board to set 
a dollar threshold for materiality in different situations, instead 
suggesting we keep the specific ownership threshold but raise it 25%. 
The same commenter also suggested changing language on the power to 
exercise ``material influence'' to ``controlling influence.'' In the 
alternative, the commenter recommended replacing the definition 
entirely with that used to define ``affiliated organization'' in Sec.  
620.1. CoBank supported removing the 5% ownership language. Fourteen 
commenters stated support for the term ``reportable business entity'' 
but would like it used with the existing definition of ``controlling 
entity'' because it reflects numerical ownership of an entity, which 
does not always mean control of that entity.
    We appreciate that it would be easier to comply with this provision 
if we simply used a bright line percentage

[[Page 50961]]

threshold. However, as mentioned previously, our intent in this 
rulemaking is to provide performance criteria using a principles-based 
approach. The final definition provides flexibility based on each 
institution's definition and support for what it considers material 
without setting specific percentages or dollar amounts. As we explained 
in the proposed rule preamble, we avoid using specific measurements to 
allow a System institution discretion to determine what constitutes a 
conflict of interest.
    Commenters also asked that we use the definition of affiliated 
organization in Sec.  620.1(a).\11\ However, the reporting requirements 
of the Standards of Conduct regulations have a purpose that is more 
expansive than that used for making annual disclosures to shareholders 
and requires consideration of more than affiliated organizations as 
that term is defined in part 620. The Standards of Conduct use of 
``reportable business entity'' serves to put the System institution on 
notice that a director or employee with an interest in a business 
entity that is significant enough that the interest may give rise to a 
conflict, or an appearance of a conflict, with that director's or 
employee's responsibilities to the System institution under certain 
circumstances requires reporting to the institution.
---------------------------------------------------------------------------

    \11\ The term ``affiliated organization'' is defined in 12 CFR 
620.1 as ``Any organization, other than a Farm Credit organization, 
of which a director, senior officer or nominee for director of the 
reporting institution is a partner, director, officer, or majority 
shareholder.'' The term as defined only applies to 12 CFR part 620.
---------------------------------------------------------------------------

    The final rule modifies the proposed definition of ``reportable 
business entity'' by adding to the third and last listed item, the 
phrase ``. . . from his or her status as a partner, director, officer, 
or majority shareholder in the entity.'' This addition comes from 12 
CFR 620.1 and is made in response to comments asking us to reconcile 
the term with that of ``affiliated organization'' in part 620. We also 
point out that if a System institution is concerned about picking up 
all Sec.  620.1(a) affiliated organizations in its standards of conduct 
disclosures, it can provide, through its own policies and procedures, 
that all Sec.  620.1(a) affiliated organizations be treated as 
reportable business entities when making conflicts of interest reports.
1-k. Resolved
    We proposed adding a new term ``resolved.'' One commenter remarked 
on this proposal, asking that we remove the term since not all 
conflicts are resolved. The commenter instead suggested leaving it to 
each institution to identify how conflicts are addressed. This term is 
being finalized as proposed as we believe it is important that there be 
a common understanding and application of the term. We agree that each 
institution should identify how conflicts are to be addressed and allow 
the institution that opportunity in its policies and procedures. The 
rule requires the institution to address the process by which real and 
apparent conflicts will be resolved and explain action(s) to be taken 
when a conflict cannot be resolved to the satisfaction of the 
institution in its policies and procedures as part of its standards of 
conduct program.
1-l. Standards of Conduct Official (or SOCO)
    Changes proposed to the definition of a Standards of Conduct 
Official (SOCO) would have required the SOCO to be an employee of the 
System institution and have the authority to report to the institution 
board of directors or designated board committee on standards of 
conduct matters. The Council, one FC bank, and 37 individuals from 
several associations commented upon this proposal. The Council and 
several other commenters specifically disagreed with limiting the SOCO 
to an employee of the institution while supporting the SOCO having 
direct access to the institution's board of directors. The Council 
asked that if the proposed limitation is finalized, FCA make clear the 
SOCO's employment reporting relationship is within the organizational 
structure, not a direct supervisory relationship with the board. One 
commenter suggested defining the SOCO as either an employee or agent of 
the institution with direct access to the institution's board of 
directors.
    FCB of Texas and some other commenters strongly disagreed with 
limiting the SOCO to employees of an institution explaining there is 
validity in using someone from the outside, especially for smaller 
associations. One commenter stated it saw the benefit of limiting the 
position to employees and another saw value in multiple SOCOs. Both 
said there should be flexibility to outsource. Other commenters 
expressed strong belief in allowing each institution to decide who 
should serve as the SOCO. These same commenters explained the value of 
outside sources for the SOCO, stating there is greater confidentiality 
and file protection.
    In response to commenters, the final rule incorporates commenter 
suggestions but in a manner that preserves the policy objectives behind 
the proposed rule. Some of the suggested changes are reflected in the 
definition of SOCO and others are captured in the rule sections on SOC 
program elements and the SOCO duties and responsibilities, both 
discussed later in this preamble. In the definition section of the 
final rule, and in response to comments, the SOCO is defined as a 
person appointed by the institution's board of directors to administer 
and report on the standards of conduct program, as well as investigate 
allegations of misconduct. We clarify in this preamble that the 
Standards of Conduct Official must be in a position to be independent 
and impartial in order to discharge his or her duties but does not have 
to be an employee. We also agree with comments that the institution is 
in the best position to know its needs and resources, including the 
person who would best satisfy the SOCO role in light of those needs and 
the program in place, whether such person is employed by the 
institution or is an outside resource.
1-m. Standards of Conduct Program
    As proposed, the Standards of Conduct Program would be defined to 
mean the policies and procedures, internal controls, and other actions 
a System institution must put into practice to meet the requirements of 
this rule. Only the FCB of Texas commented on this term, suggesting 
that the definition include ``specific guidelines and comprehensive 
rules.'' The definition explains that the Standards of Conduct Program 
includes the policies and procedures, internal controls, audit, 
training, and other activities that promote ethical behavior. 
Therefore, we are not making the suggested change, preferring to keep 
the principals-based approach of the rule. Further, as was explained in 
the proposed rule, we reiterate that the Standards of Conduct Program 
is the totality of the policies, procedures, internal controls, audit, 
training, and other activities used to promote ethical behavior at a 
System institution.
2. Standards of Conduct--Core Principles. [Sec.  612.2135]
    We proposed substantially revising current rule Sec.  612.2135 to 
set forth the core principles we believe are essential to fostering an 
ethical culture within the System. We also proposed certain basic 
minimum requirements for compliance as well as requiring cooperation 
between employees, directors, and the SOCO. We received 23 comment 
letters on this section, including one from the Council and two FC 
banks. Most of these same commenters asked us to retain the existing 
rule instead of what was proposed, stating the proposed

[[Page 50962]]

changes were not an improvement. FCB of Texas generally supported the 
proposed core principles but asked for a few changes in the language 
and in the organization of the section. Specifically, FCB of Texas 
suggested listing all the proposed provisions sequentially.
    We finalize this section substantially as proposed but make some 
changes in response to comments that we discuss in the subsections 
below. We also make small changes to improve readability and align the 
format of the rule, such as adding headings to main paragraphs and 
clarifying language on fulfilling the core principles. At the request 
of commenters, we are retaining the numbering of this section as Sec.  
612.2135.
2-a. Compliance With Ethical Standards
    In paragraph (a) we proposed increasing the ethical standard to 
``the highest ethical standards of the financial banking industry, 
including standards of care, honesty, integrity, and fairness.'' The 
Council and most other commenters to this section objected to raising 
the standard from ``high'' to ``highest'' and using the financial 
banking industry as the guide. The Council and six others said the 
highest standard is ambiguous, leading to uncertainty, and recommended 
keeping the existing high standard. The Council, FCB of Texas, and 
twenty other commenters stated the current high standard does not need 
to be replaced, with FCB of Texas suggesting use of a more focused 
approach directed at the System's reputation and mission. CoBank and 
one other commenter expressed support for maintaining the highest 
ethical standards but characterized it as an aspirational goal rather 
than a requirement. The Council, CoBank, and seven other commenters 
remarked that the financial banking industry is an inappropriate guide 
because commercial banks are not subject to the same conduct rules as 
the System. Commenters asked that reference to financial banking 
industry be removed. CoBank suggested keeping the current language of 
Sec.  612.2135(a) and one other commenter suggested replacing proposed 
financial banking industry with ``financial services industry''.
    In response to comments, we retain the current rule's language 
requiring ``high'' ethical standards and remove the proposed reference 
to the financial banking industry. We also replace proposed language 
asking employees and directors to ``vet'' conflicts of interest with 
the SOCO to clarify that the provision requires identification and 
reporting conflicts of interest as well as resolving those conflicts. 
We make this change in direct response to FCB of Texas and fourteen 
other commenters stating the verbiage ``vet'' was confusing. To further 
clarify this provision, the final rule lists reporting to the SOCO 
conflicts of interest involving a director or employee (or family and 
reportable business entities thereof) separately from the requirement 
to work with the SOCO to identify conflicts and resolve any conflict 
reported.
    FCB of Texas suggested that we add to proposed paragraph (a)(5) the 
words ``between an individual's personal interests and official 
duties'' before the words ``in System business relationships and 
activities'' to make clear where conflicts of interest actually arise. 
We are not making the changes suggested by FCB of Texas. The suggested 
language by FCB of Texas was designed to clarify the provision. We 
believe we have achieved the requested clarity through other changes 
made to this provision.
2-b. Compliance With Fiduciary Duties
    We proposed requiring directors and employees to fulfill fiduciary 
duties, as applicable. FCB of Texas asked that we insert ``as a 
director or employee'' when talking about fiduciary duties instead of 
the phrase ``as applicable.'' Five commenters remarked that the 
proposal would extend fiduciary duties beyond those currently in law, 
causing a significant burden for all concerned. One of these commenters 
also remarked that the proposal would change director and senior 
officer disclosures made under 12 CFR 620.6, significantly expanding 
them beyond directors and senior officers and adding no benefit. The 
commenters asked that the provision only apply to directors and senior 
officers or be removed entirely. Commenters expressed that not all 
employees have fiduciary duties and that the phrase ``as applicable'' 
is confusing and should be clarified or eliminated.
    FCA expects System institution directors to acknowledge their 
fiduciary duties. Additionally, most officers have fiduciary duties, 
whether they are senior officers or not. To distinguish established 
fiduciary duties from other conduct requirements, the final rule moves 
the provision on fulfilling fiduciary duties to Sec.  612.2135(c) and 
adds clarifying language that these responsibilities apply to officers 
and directors of the institution. We continue to believe there are 
fiduciary responsibilities held by non-officer employees in the 
financial sector. However, we are not currently regulating it for all 
employees as a System institution is in the best position to determine 
which employees have fiduciary duties based on job responsibilities. We 
expect each institution to address these responsibilities within the 
Standards of Conduct policies and procedures.
2-c. Compliance With Law
    As proposed, directors and employees would be required to comply 
with all applicable laws and regulations. One commenter expressed that 
this provision should also include violations of state or local laws in 
determining a standards of conduct violation. The final rule at Sec.  
612.2135(b) does not add the distinction requested by the commenter but 
does contain clarification that compliance with an institution's 
standards of conduct means following the SOC policies and procedures as 
well as law and regulation. We believe that ``all applicable laws'' 
would include state and local laws and therefore, it is unnecessary to 
make it a condition in this final rule. However, a System institution 
may specifically address state and local laws in its policies and 
procedures if it wishes. We also clarify in Sec.  612.2135(b) that the 
provision on reporting known or suspected activities refers to 
anonymous reporting procedures.
2-d. Compliance With Training
    We proposed to require directors and employees to certify 
participation in the institution's annual standards of conduct 
training. The FCB of Texas suggested that this provision belongs in the 
section that would establish the standards of conduct training as part 
of the Standards of Conduct Program. We agree with this comment and 
have relocated the provision to the section on standards of conduct 
training. We renumber the remaining subparagraphs of this section in 
conformance with this change.
    Six commenters expressed that directors and employees should be 
able to certify participation in standards of conduct training using 
methods other than in writing. We did not intend to limit the manner in 
which conflicts of interest reports are filed or how training 
participation is certified as long as records are created. Therefore, 
we have added language to the definition section at Sec.  612.2130 to 
explain that for purposes of this subpart, words like report, certify, 
file, and sign are to be treated as permitting their electronic 
equivalent.\12\ Institutions are expected

[[Page 50963]]

to specify what methods will be used within their standards of conduct 
policies and procedures.\13\ Institutions are cautioned that the option 
to use electronic methods does not mean the contents of any standards 
of conduct filings may differ depending on the format used: The 
contents are the same whether paper or electronic means are used. 
Institutions must also ensure that any electronic conversion of these 
disclosures does not adversely affect the filing of annual reports.
---------------------------------------------------------------------------

    \12\ This language should not be interpreted as referring to our 
regulations in part 609 on electronic commerce. Standards of conduct 
disclosures are not considered ``business transactions'' so neither 
the e-commerce or e-sign provisions of part 609 apply.
    \13\ Institution employees have a different legal status than do 
directors. Employees can be required to use electronic filing 
procedures as a condition of employment, but directors are not 
``employees'' so cannot be treated as such. Instead, to require 
electronic filing for directors, the SOC policies and procedures 
would need to specifically address the issue.
---------------------------------------------------------------------------

3. Elements of a Standards of Conduct Program. [Sec.  612.2137]
    Proposed Sec.  612.2137 would set forth a System institution's 
responsibility to establish a Standards of Conduct Program that 
includes policies and procedures and a Code of Ethics, among other 
things, to implement the objectives of this rule. We received 118 
comment letters on this section of the proposed rule, including letters 
from the Council and three FC banks. A significant number of the 
commenters asked that we retain current rule provisions in certain 
areas, including the treatment of agents, family and reportable 
business entities under the Standards of Conduct Program. Commenters 
also asked for clarifications and exceptions to what was proposed, with 
a few asking us to relocate reporting information to the section on 
disclosures and training information to the section on SOCO duties.
    We finalize the rule with changes based on comments received and we 
discuss those changes in the subsections below. We also make small 
changes to improve readability and align the format of the rule, such 
as adding headings to main paragraphs and clarifying language on 
designing a standards of conduct program.
3-a. Core Principles and SOCO. [Sec.  612.2137(a) and (b)]
    Proposed Sec.  612.2137(a) would establish that the Standards of 
Conduct Program set forth the core principles in Sec.  612.2135 and 
provide resources for its implementation. FCB of Texas suggested that 
language be inserted after the reference to Sec.  612.2135 to make 
explicit that the Standards of Conduct Program comply with more than 
just the core principles of the regulation. We agree and have revised 
the regulatory text in final rule Sec.  612.2137(a) accordingly. This 
commenter also suggested that the preamble language ``including but not 
limited to, additional staffing or access to outside counsel where 
necessary,'' be added to the end of Sec.  612.2137(a). We are making 
this change but not using specific language provided. Instead, we have 
added language to require resources for both implementation and 
operation of the SOC program. We leave specificity on the type of 
resources to each institution. For example, reference to adequate 
resources could include staffing and access to outside counsel if the 
institution deems it necessary. It is up to each institution's board of 
directors to provide the necessary resources to implement an effective 
SOC program.
(i) Recordkeeping and SOC Program. [Sec.  612.2137(a)]
    Proposed Sec.  612.2137 would require a System institution to 
maintain records of conflicts of interest reports, investigations, and 
other documents for at least 6 years. As proposed, institutions would 
be required to protect these records and other confidential information 
obtained as part of the standards of conduct program from unauthorized 
release. Each institution would also have to periodically review and 
update the SOC program. One commenter expressed general agreement with 
the recordkeeping requirements but asked for wording changes. Another 
commenter suggested that these records be maintained by outside counsel 
for confidentiality reasons. FCB of Texas suggested naming the person 
responsible for the reviews and updates.
    In response to the comment asking us to clarify record retention 
and consolidate like provisions, we move language from proposed 
paragraph (d) to this paragraph, which requires maintaining conflict of 
interest reports a minimum of six years. Language from proposed 
paragraph (e)(1) on maintaining SOC program records of investigations 
for six years is also moved into paragraph (a). No significant wording 
was revised but the suggested language of the commenter was considered. 
Although not in rule text, we clarify that a System institution may 
choose to place records with outside counsel, but we decline to make it 
a requirement. We also apply to this section the comment from FCB of 
Texas on naming responsible parties in the section addressing SOC 
program administration.
(ii) Appointing a SOCO. [Sec.  612.2137(b)]
    In Sec.  612.2137(b), we finalize the requirement to appoint a SOCO 
and add language in response to comments on who may serve as a SOCO. 
When offering comments on proposed duties of the SOCO, thirty-two 
commenters also remarked on the proposed limit of who may be SOCO in 
two regards: The limitation of the SOCO being an employee and the 
supervisory implications of the SOCO reporting directly to the board. 
These commenters generally expressed that the board should retain full 
discretion in selecting the SOCO and espoused the belief that using a 
person outside the institution as SOCO provides greater independence 
and security in monitoring and reporting conflicts. Six commenters from 
one association explained that at smaller associations only the Chief 
Executive Officer (CEO) reports directly to the board and the CEO may 
not be the best person to serve as the SOCO. These same commenters 
expressed a preference for continuing the existing practice of 
contracting with an outside law firm, where the SOCO is free from undue 
pressures by management and offers an independence desirable to 
employees for discussing conflict issues. Twenty commenters from two 
associations stated that the board should retain the discretion to 
select the SOCO whether inside or outside the institution. One other 
commenter stated that FCA's reasons for proposing the SOCO be an 
employee can be satisfied to a greater extent by outsourcing the 
position, as the independence from internal operations gives greater 
objectivity in standards of conduct issues and makes reporting directly 
to the board more manageable. Another commenter expressed significant 
concern with having a SOCO report to its board for standards of conduct 
issues but report to management on other job tasks. This commenter asks 
if FCA is insisting institutions create a stand-alone, full time SOCO 
position. If so, the commenter said that would be a real burden for 
smaller associations. Another commenter stated the proposed SOCO 
limitation threatens critical independence and objectivity. This 
commenter also remarked that the proposed change removes clarity, makes 
the SOCO role more difficult for employees to hold as the proposed SOCO 
duties appear to require legal expertise. This commenter also remarked 
upon the day-to-day work environment for employees serving as SOCO, 
especially once the employee takes actions against co-workers or

[[Page 50964]]

supervisors for standards of conduct noncompliance.
    The final rule removes the proposed restriction on using only 
employees as the SOCO. To offer flexibility in response to comments, 
the rule specifically authorizes institutions to appoint a SOCO from 
several sources including using: One if its officers, the resources of 
a 4.25 service corporation, another institution's SOCO, or contracting 
with a third-party to serve as SOCO (including under a contract shared 
with another System institution). In situations where institutions 
share a SOCO, the rule requires the existence of a separate 
confidential relationship. Whether the SOCO serves in a full-time 
capacity, as a collateral duty, or in an as needed capacity is a 
decision of the institution.
3-b. Code of Ethics. [Sec.  612.2137(c)]
    Proposed Sec.  612.2137(c) would require each System institution to 
adopt a Code of Ethics that establishes principles and values for the 
ethical conduct of its directors and employees, including standards for 
appropriate professional conduct at the workplace and in matters 
related to employment. It was proposed that System institutions also be 
required to post the Code of Ethics on the external website for public 
access. The Council, CoBank, and most other commenters remarked that 
the Code should not include matters normally associated with employment 
conduct. Seventeen commenters specifically said much of the provision 
was redundant of work done by the human resources staff, making it 
inefficient to have the SOCO duplicate those efforts, and asking that 
language be removed. CoBank supported requiring a Code of Ethics but 
objected to publishing it for fear of litigation. Two commenters also 
objected to public posting of the Code, with one stating the 
whistleblower information is already on the website providing the 
public a venue for reporting issues. Eighteen commenters supported the 
suggestion of posting a general statement of the institution's 
professional integrity and conduct but saw no benefit in posting the 
entire Code of Ethics. Instead, most of these commenters said they 
viewed posting the Code as an invitation for borrowers to contest 
credit decisions on other than the merits. FCB of Texas supported 
requiring a Code of Ethics and publishing it, if the Code is limited to 
general ethical statements and does not include matters related to 
employment. This commenter also offered specific wording to soften the 
regulation in this area. Comments asking to rename this Code as a 
``code of conduct'' were made when remarking on the definition for 
``Code of Ethics'' and are addressed in that section.
    The proposed requirement to adopt and maintain a written Code of 
Ethics is finalized with the following changes made in response to 
comments received:
     Adding clarifying language explaining the Code must be 
kept up-to-date;
     Replacing language regarding employment matters with 
language explaining the Code is directed at business transactions; and
     Revising the proposed requirement of posting the Code on 
an institution's website with a requirement for posting a statement 
that the Code has been adopted. The statement must summarize the Code 
and advise the public that a copy of the Code of Ethics is available on 
request and at no cost.
3-c. Policies and Procedures. [Sec.  612.2137(d)]
    As proposed, a System institution would have responsibility to 
establish policies and procedures that further the objectives of this 
rule. We noted that some commenters confused the proposed 
responsibilities of the System institution to develop policies and 
procedures on reporting of conflicts of interest in real time with the 
proposal for the periodic reporting of other matters. The institution, 
its directors, its employees and the SOCO all have a role in 
implementing the Standards of Conduct Program. The periodic reporting 
of other matters is a responsibility of each director and employee. 
Developing policies and procedures for those reporting responsibilities 
is a duty of the institution. We offer further clarifications in the 
respective discussions that follow.
    In the process of addressing comments to specific provisions within 
this section, the organization and numbering of paragraphs has changed, 
including:
     Proposed paragraph (d)(1) on contents of a conflicts of 
interest report is renumbered paragraph (d)(2).
     Proposed paragraph (d)(2) on resolving conflicts is 
renumbered paragraph (d)(3).
     Provisions on third party relationships in proposed 
paragraph (d)(3) is renumbered paragraph (d)(4).
     Proposed paragraphs (d)(4) and (5) on enforcing the SOC 
program are consolidated into renumbered paragraph (d)(6) and now 
follow renumbered paragraph (d)(5) discussing receipt of gifts.
     Proposed paragraph (e)(3) on anonymous reporting is moved 
and renumbered as paragraph (d)(7). As finalized, Sec.  612.2137(d)(1) 
contains the requirement to file a conflict of interest report, 
including the timing of the report, and providing disclosure 
information required under Sec.  620.6(a), (e), and (f). The part 620 
items were moved to this section in partial response to comments asking 
us to reconcile the conflicts of interest disclosure requirements of 
parts 612 and 620.
    Commenters were concerned that the proposed rule preamble 
discussion on requirements for reporting of material interests was not 
adequately reflected in the rule. To address commenters' concerns, we 
include a requirement in final rule Sec.  612.2137(d)(2) that the 
System institution must establish criteria to help directors, 
employees, agents and the SOCO identify conflicts and those that are 
material.
(i) Identifying ``Ordinary course of business'' Transactions and 
Materiality. [Sec.  612.2137(d)(2)(i) and (ii)]
    As proposed, each System institution would have the flexibility to 
develop a Standards of Conduct Program most suited to its unique needs, 
and to use its existing Standards of Conduct Program if it is adequate 
to satisfy the purposes of this regulation. The Council and several 
other commenters objected to the rule requiring reports outside the 
ordinary course of business, stating it was too broad. The Council, FCB 
of Texas and some other commenters asked that this provision give the 
SOCO authority to exclude non-material activities and that transactions 
be limited to fiscal year interactions with institution directors, 
employees, and agents. Fourteen commenters stated the provision 
conflicted with other provisions as it is not limited to transactions 
with the institution but could be read to include all business 
transactions. FCB of Texas observed the rule does not require reporting 
ordinary business transactions as is done in 12 CFR 620.6(e) and (f). 
Similarly, one commenter stated the requirement to annually report all 
business transactions was too broad and inconsistent with 12 CFR 620.6 
disclosures. This commenter asked that current reporting language be 
kept instead of the proposed provision. The commenter also asked that 
the reporting expectations be reconciled with 12 CFR 620.6(e) and (f) 
as well as the term ``affiliated organization'' used in part 620. One 
commenter asked for general clarifications and to relax the 
requirements to allow institutions to tailor their policies to their 
needs.
    We discussed in the preamble to the proposed rule our expectation 
that each System institution should set its own

[[Page 50965]]

specific parameters for what would constitute a material financial 
interest and what activities and transactions would present real or 
potential conflicts, including those in the ordinary course of 
business.\14\ Some commenters were concerned that we did not clearly 
set forth this expectation in the rule. In response to comments, we are 
revising the final rule at Sec.  612.2137(d) to clearly require that 
every System institution have policies and procedures to help directors 
and employees identify interests and circumstances that could lead to a 
conflict of interest, including identifying transactions posing real or 
apparent conflicts of interest, explaining what would constitute a 
material financial interest, and establishing how transactions 
occurring in the ordinary course of business are identified. The board 
must give due consideration to the potential adverse impact of any 
activities identified as not presenting conflicts. We decline the 
request to give the SOCO specific authority to exclude non-material 
transactions. The authority and requirement to define what constitutes 
a material transaction lies with the board of directors. The SOCO 
implements these policies as required under Sec.  612.2170.
---------------------------------------------------------------------------

    \14\ 83 FR 27922, 27924.
---------------------------------------------------------------------------

    FCB of Texas asked that we move all reporting details to the 
proposed disclosure section. We believe the final rule achieves this by 
consolidating all reporting requirements in Sec.  612.2145, which 
correspond with the policy requirements in Sec.  612.2137(d). However, 
discussion of reporting content and how reports are made is still a 
part of Sec.  612.2137 as each institution's board of director must 
address these issues in their SOC program policies and procedures.
(ii) Identifying Reportable Business Entities and Family
    Proposed Sec.  612.2137(d)(1)(iii) and (iv) would require System 
institutions to establish policies and procedures for disclosing 
conflicts arising from family and business entities. We received 
several comments on this proposal and address them in III.B.4 of this 
preamble discussion of provisions on the reporting of conflicts.
(iii) Standards of Conduct Policies and Procedures for Resolving 
Conflicts of Interest. [Sec.  612.2137(d)(3)]
    We proposed that an institution's policies and procedures address 
how reported conflicts of interest will be resolved. We received no 
substantive comments on this area, but there were related comments 
asking us to clarify the role of the SOCO in the resolution process. We 
finalize the rule in this area substantially as proposed but make some 
changes to improve readability and clarity. We also add language 
clarifying that the policies and procedures must explain the process 
for how conflicts will be resolved and the role of the SOCO in 
resolving conflicts. This clarification is made in response to comments 
on the issue and is in keeping with our principals-based approach to 
the rule.
(iv) Standards of Conduct Policies and Procedures for Agents and Other 
Third-Parties. [Sec.  612.2137(d)(4)]
    As proposed, System institutions would establish policies and 
procedures to address third-party relationships, including disclosing 
known conflicts. Several commenters questioned the ability to get 
agents to cooperate in reporting the required information and whether 
all System personnel know all the institution's agents. Some 
specifically suggested keeping the current requirements of Sec.  
612.2260 saying it is clear and understandable. The Council asked how 
the phrase ``third-party relationships'' differed from the proposed 
definition of ``agent''. The Council, CoBank and several others 
suggested that those parties not covered as ``agents'' be handled by 
the institution's vendor management policies. The Council and nineteen 
other commenters also asked that service providers covered by 
professional conduct and ethics standards be exempted from compliance 
with an institution's standards of conduct or be treated as satisfying 
those requirements if in compliance with their own professional and 
ethical standards. CoBank and some others asked that existing agent 
contracts be grandfathered in to avoid costly renegotiations. A few 
commenters asked that we allow institutions to follow reasonable 
policies on agents. Four commenters remarked on preamble language 
discussing conditioning an agent's appointment on the misconduct rules, 
stating that is an overreach and inconsistent with rule text. Another 
comment stated vendors cannot be expected to know the institution's SOC 
program and asked us to remove the requirement. Still others asked that 
we add a knowledge element to the reporting requirement for agents. One 
commenter pointed out that most agents do not have direct knowledge of 
the institution's borrowers so would be unable to accurately report any 
potential conflicts of interest. Seventeen commenters said the 
requirement was unnecessary as contract language to engage an agent 
already has behavior clauses.
    In response to comments asking to keep the current rules on agents 
in 12 CFR 612.2260, the final rule does not implement the proposed 
removal of that section. However, the existing provision is renumbered 
as Sec.  612.2180. A full discussion of this retained section is 
contained later in this preamble at III.B.7. In connection with making 
this requested change, the final rule replaces proposed language with 
language requiring an institution's board of directors to adopt 
conflict of interest polices for third party relationships (including 
agents). And, following the comments regarding use of contracts, the 
final rule requires each board to apply ethical safeguards in contracts 
with third parties, including agents. The final rule also implements 
commenter suggestions by adding a knowledge requirement of conflicts 
disclosed by agents and other third-parties. At a minimum, board 
policies address its expectations for agents and other third-party 
service providers to disclose known conflicts to the institution. By 
definition, an agent is someone who has the power to act for the 
institution either by contract or apparent authority; therefore, it is 
important that agents and other third-parties maintain the same high 
ethical standards as directors and employees. We consider not 
finalizing the proposed third-party reporting provision, along with 
keeping existing rule text on conflict of interest reporting by agents, 
as satisfying all other comments asking for changes to that 
requirement.
    Some commenters objected to the suggestion in the proposed rule 
preamble that a System institution should require agents to acknowledge 
a System institution's Code of Ethics by signing it. This is not a 
requirement in the rule, although a System institution could consider 
imposing this requirement on their own in future agency relationships.
(v) Policies and Procedures on Gifts. [Sec.  612.2137(d)(5)]
    As proposed, System institutions would be required to establish 
policies and procedures prohibiting gifts but could have rules in place 
to allow directors and employees to accept de minimis gifts. The 
Council and three others asked that a gift exception be made for 
transactions that would not otherwise be reported, such as giveaways of 
token items, explaining the de minimis language is unclear on this 
point. AgFirst FCB and seventeen other commenters asked the gift 
exceptions

[[Page 50966]]

include traditional gift giving events or gift between family and 
friends. CoBank supported the de minimis gift exception. Twelve 
commenters asked that the rule clarify gifts reported do not include de 
minimis gifts. FCB of Texas commented that the limitations on gifts is 
more restrictive than the current rule or past proposals as this rule 
does not tie gift restrictions to those intended to influence official 
actions. This commenter then stated that FCA offered no rationale for 
the more restrictive gift rules. FCB of Texas also identified 
inconsistencies with this provision as compared to the proposed 
reporting provisions which allow exceptions for de minimis gifts. FCB 
of Texas suggested that to resolve this, at a minimum, the rule should 
replace the word ``prohibiting'' with the words ``governing 
permissible'' gifts. FCB of Texas also suggested allowing specific 
exceptions for reasonable business expenses like those outlined in the 
FDIC's Guidelines for Compliance with the Federal Bank Bribery 
Laws.\15\
---------------------------------------------------------------------------

    \15\ Federal Deposit Insurance Corporation, FDIC Law, 
Regulations, Related Acts. 5000--Statements of Policy, ``Guidelines 
for Compliance With the Federal Bank Bribery Law,'' Nov. 10, 1987, 
https://www.fdic.gov/regulations/laws/rules/5000-2300.html#fdic5000guidelinesfc.
---------------------------------------------------------------------------

    The final rule clarifies that the required policies and procedures 
on gifts address those gifts not otherwise prohibited by FCA 
regulation. As requested by commenters, the final rule alters proposed 
language on the contents of these policies and procedures to provide 
that institutions may make appropriate exceptions for gift giving 
related to non-business events as long as gift exchanges would not be 
viewed as an attempt to influence official institution activities. 
While commenters suggested various changes and specific exceptions on 
gifts, in keeping with the principals-based approach of this rulemaking 
the final rule does not adopt those detailed suggestions nor do we 
include a de minimis level. Instead, the rule leaves it to the 
institution to set specific gift parameters. The final rule also 
clarifies that authorized gift exchanges must have de minimis 
thresholds at both the individual gift level and in the annual 
aggregate, per recipient.
    We do not believe the restrictions on gifts are more restrictive. 
The principles-based approach to the regulations allows the 
institutions to set criteria for accepting gifts and includes an 
exception for non-business events where the gift is not viewed by the 
institution as attempting to influence official institution business. 
We encourage institutions to have internal controls or policies to 
ensure adequate de minimis levels are set and followed. The final rule 
retains the proposed requirement that the policies and procedures 
establish disclosure requirements for gifts received as well as any 
disposed of because they were impermissible. In response to other 
changes, this provision is renumbered as Sec.  612.2137(d)(5).
(vi) SOC Program Enforcement. [Sec.  612.2137(d)(6)]
    Proposed paragraphs (d)(4) and (5) would require SOC program 
policies and procedures to discuss how the SOC program is monitored and 
enforced. We received no substantive comments on this area, but there 
were related comments asking us to clarify the role of the SOCO in 
enforcement actions. We finalize the rule in this area substantially as 
proposed but make some changes to improve readability and clarity, 
including consolidating the provisions into renumbered paragraph 
(d)(6). As requested by commenters, we also specifically require the 
policies and procedures identify who is authorized to take enforcement 
actions and discuss the SOCO role in investigating certain conduct 
issues.
(vii) Anonymous Reporting. [Sec.  612.2137(d)(7)]
    The proposed rule would require internal controls for anonymous 
reporting of suspected standards of conduct and Code of Ethics 
violations through a hotline or other reporting procedure. FCB of Texas 
suggested adding language to clarify that reporting is for any 
individual action. CoBank stated that this provision appears to codify 
the Whistleblower Program that is already in place for reporting 
financial improprieties and used for other types of anonymous reporting 
and thus the new provision should be eliminated. We finalize the rule 
substantially as proposed but add reference to individuals making a 
report and make small changes to improve readability. We feel that 
providing an avenue to anonymously report both known and suspected 
violations is an important part of a Standards of Conduct Program and 
believe it should be included within SOC program policies and 
procedures even when there is Whistleblower Program in place. We also 
add that nothing in the rule prevents institutions from adapting 
existing Whistleblower or Hotline programs for SOC program purposes. In 
response to other changes, this provision is renumbered as Sec.  
612.2137(d)(7).
3-d. Internal Controls for SOC Program. [Sec.  612.2137(e)]
    Proposed Sec.  612.2137(e) would require each System institution to 
arrange periodic internal audits of the Standards of Conduct Program to 
identity weaknesses, measure effectiveness, and conduct reviews to 
prescribe necessary corrective actions. Two commenters said the program 
as written would be costly to implement especially for those 
associations who do not have an internal audit department. The 
commenters asked that the word ``internal'' be removed to allow for 
outsourcing the service. One commenter also asked if FCA was requiring 
each institution to establish a new department of internal SOC audits. 
Another commenter asked us to explain how the provision would be 
applied at unincorporated business entities (UBE) of a System 
institution.
    We finalize the rule in this area substantially as proposed but, as 
discussed earlier, moved some provisions to other paragraphs. We also 
add a heading to the paragraph in keeping with the overall format of 
the rule. We make some clarifying changes considered necessary based on 
comments received and to improve readability. The final rule clarifies 
that the institution's board of directors establishes the internal 
controls program but does so with the assistance of the SOCO and other 
officers of the institution. However, the board ultimately decides the 
scope of the internal review and identifies who will conduct the audit. 
Also, the final rule clarifies that all audit results of the SOC 
program go directly to the board. A commenter asked about the proposed 
rule's reference to UBEs so the final rule adds reference to FCA 
regulations in Sec.  611.1150(b).
    The final rule's requirement for an ``internal'' audit of the SOC 
program refers to an audit of the internal operations of the program. 
It does not limit the persons who perform the audit. System 
institutions are not required to establish an internal audit 
department. While we recognize there could be some additional costs 
involved, the audit could be a component of the institution's risk 
assessment process as established by the Audit Committee and conducted 
by a person or entity independent of the Standards of Conduct Program. 
The board is responsible for identifying who will conduct the internal 
audit, which is important to ensure the program is being managed 
effectively. We believe that to ensure a strong ethical culture, 
ethical conduct must be encouraged

[[Page 50967]]

across all System activities, including those conducted in UBEs. 
Therefore, we require periodic audits that cover the entire System 
institution.
3-e. Training Policies. [Sec.  612.2137(f)]
    Proposed Sec.  612.2137(f) would require each System institution to 
establish within its policies and procedures SOC program training, 
setting the timeframes for conducting such training. FCB of Texas 
remarked that this could be duplicative of the training requirements 
proposed elsewhere and suggested consolidating them all into this 
section. As discussed earlier in this preamble at III.B.2-d, the final 
rule relocates most provisions on standards of conduct training into 
this paragraph. The final rule makes some clarifying changes to Sec.  
612.2137(f) considered necessary based on consolidating like provisions 
and adds a heading to the paragraph in keeping with the overall format 
of the rule. Changes made in response to other comments are discussed 
below.
(i) New Director SOC Program Training
    As proposed, new directors would receive standards of conduct 
training 60 calendar days before or after the director's election or 
beginning of his or her term. The Council, CoBank, and 16 others 
separately commented on the proposed timeframes, questioning if there 
was an error in asking for training before a director begins his or her 
term of service. The commenters explained the unworkability of trying 
to administer training before a director begins his or her term of 
office and how such an action would be contrary to cooperative 
principles. Commenters also pointed out there is an existing regulation 
at Sec.  611.210(b) requiring director orientation training to be 
completed within one year of a director assuming his or her position on 
the board. Commenters asked that we correct the error by having the 
required training occur 60 calendar days after a director's term of 
office begins. Some also asked that we use the one-year time frame of 
Sec.  611.210(b) instead of the proposed 60 days.
    We agree with commenters that it is impractical as well as 
generally impossible to provide training to directors who have not yet 
begun serving their terms of office. Directors are not employees of the 
institution so providing individuals access to the institution's 
resources for training or other reasons before board service would be 
impermissible due to confidentiality laws and regulations, especially 
as there is no basis under which to obtain confidentiality agreements 
from these individuals until board service begins. It is an established 
corporate governance principle that once elected to the board a 
director owes his or her fiduciary duties, including a duty of 
confidentiality, to the institution and shareholders as a whole. As 
such, an institution may take measures to ensure each director abides 
by policies defining and specifying the treatment of the institution's 
confidential information, including restricting directors from 
disclosing confidential information to the shareholders electing them 
to serve on the institution's board. However, this authority does not 
arise until board service begins. We appreciate commenters identifying 
our inadvertent mistake. In this final rule we correct the error on 
director training by changing ``before'' to ``after'' and, for further 
clarity and consistency, use the language of Sec.  611.210(b) on when 
to start the 60 days. New director training must occur within 60 
calendar days of a director assuming his or her position on the board. 
We decline requests to extend the timeframe to one year as directors 
should be made aware of their standards of conduct responsibilities as 
soon as possible. We clarify that this new director standards of 
conduct training can be considered part of the overall Sec.  611.210(b) 
orientation training as nothing in Sec.  611.210(b) requires all 
components of orientation training to occur at one time; rather, it all 
must just be completed within 1 year.
(ii) New Employee SOC Program Training
    We proposed that newly hired employees receive training within five 
business days of starting employment. One commenter asked that we 
provide a longer timeframe, suggesting 10 business days. FCB of Texas 
also remarked five days was too short. In response to the commenters' 
request for a longer period of time, we are changing the time period in 
the final rule from five days to the suggested ten days. We believe the 
requested timeframe of 10 days is reasonable and meets policy 
objectives.
(iii) Periodic SOC Program Training
    Over 30 commenters supported the requirement for annual SOC 
training, with fourteen of them asking to incorporate it into existing 
training requirements rather than treat it as a separate training 
event. Six commenters asked that periodic training be every other year 
(e.g., biennial) instead of each year as that timing is sufficient to 
stay current on requirements. Five commenters asked us to clarify that 
SOC program training on fiduciary duties would only apply to directors, 
not employees as well.
    We believe it is important for all employees, not just directors, 
to receive SOC training to ensure knowledge of prohibited conduct and 
any changes to the SOC program. We do not agree that training every 2 
years is sufficient and final the requirement for annual training. We 
think it is important for training to reinforce the SOC requirements. 
The institution can decide if that can be accomplished effectively by 
incorporating the SOC training into existing training. Additional 
comments on SOC program training are addressed in III.B.6-c of this 
preamble.
4. Disclosing and Reporting Conflicts of Interest. [Sec.  612.2145]
    We proposed consolidating and revising existing standards of 
conduct reporting requirements to enhance the quality of information 
captured in a standards of conduct report as well as implement a 
principles-based approach. As proposed, the rule would establish 
requirements for directors and employees to identify and report 
conflicts of interest. We received 132 comments on the proposed changes 
to the standards of conduct reporting requirements, including comments 
from the Council and three FC banks, as well as individual letters 
representing 27 associations. The majority of comments were directed at 
the proposed paragraph regarding the contents of conflict of interest 
reports.
    We finalize the provisions on reporting conflicts of interest with 
changes based on comments received. We discuss those changes in the 
subsections below. We also make small changes to improve readability 
and align the format of the rule, such as adding headings to main 
paragraphs and clarifying language.
    FCB of Texas asked that the heading for this section read as only 
``reporting requirements'' to avoid confusion. In response to the 
suggestion on the heading for this section, the final rule changes the 
heading for this provision to ``Disclosing and reporting conflicts of 
interest.'' Additionally, in response to requests that we keep existing 
section numbering, we do not final the proposal to move reporting 
requirements to a new Sec.  612.2138. Section 612.2145, which currently 
addresses SOC program reporting for directors, will now encompass 
reporting for directors and employees. The Sec.  612.2155 employee 
reporting section is removed and reserved.

[[Page 50968]]

4-a. Disclosing Conflicts of Interest. [Sec.  612.2145(a)]
    As proposed, directors and employees would be required to take 
affirmative action to identify, report and resolve conflicts or 
potential conflicts of interest of which they are aware. It is intended 
to compel each director and employee to take ownership of and invest in 
ethical responsibilities. We also proposed that a director or employee 
with a conflict in a matter subject to official action refrain from 
participating in the official action (i.e., recusal). FCB of Texas and 
one other commenter remarked that provisions on cooperating was 
redundant with requirements to report conflicts and suggested 
consolidating them within paragraph (a), leaving recusal issues in 
paragraph (b). One commenter expressed appreciation for adding rule 
text on recusals, calling it an improvement over the existing 
regulation.
    The final rule consolidates into paragraph (a) the proposed 
paragraphs discussing identification and reporting conflicts of 
interest. To further group the responsibilities into paragraph (a), the 
proposed contents of paragraph (b) are consolidated and renumbered as 
(a)(1). As suggested by a commenter, language on recusals is now in new 
paragraph (a)(1). In the process of consolidating these provisions, 
some language was revised for readability and to remove redundancy. 
Also, a new paragraph (a)(2) is added as a conforming change with 
retaining existing language regarding reporting illegal or unethical 
behavior, which is further discussed in this preamble at III.B.6-d. The 
contents of paragraph (a)(2) resemble the core principles in Sec.  
612.2135(b)(3).
(i) Scope of Transactions Disclosed
    CoBank and several others asked that the requirement to report 
``any matter'' be limited to transactions outside the ordinary course 
of business. The commenters also asked to limit entity reporting to 
material business transactions with the System. Commenters explained 
that normal business interactions should not trigger a report as 
operating as a cooperative, many System directors are farmers and 
conduct farm business in the same communities as their institution's 
borrowers. The final rule replaces the proposed language on reporting 
``any matter, transactions or activities pending at the System 
institution'' with language explaining that identification, disclosure 
and reporting on conflicts means ``any interest or circumstance that 
does or could constitute'' a conflict or potential conflict. The final 
rule has a related requirement for directors and employees to disclose 
actual conflicts with ``a matter, transaction or activity subject to 
official action'' by the institution. We think that it is more 
important to both disclose the conflict of interest and refrain from 
participating in any action or board discussion of the matter rather 
than prescribe what must be in the disclosure. As was proposed, the 
final rule at Sec.  612.2145(a)(1) requires directors and employees to 
refrain from participating in official actions at the institution that 
are related to the matter disclosed. In keeping with the principals-
based approach, we have not finalized the proposed language detailing 
what the disclosure must contain. Additionally, System institutions 
should understand that identifying conflicts uses a reasonable person's 
perspective in a manner that gives full consideration to the 
cooperative structure of the System, and institutions may build their 
SOC program policies and procedures accordingly.
(ii) Identifying Conflicts of Interest
    As proposed, directors and employees would identify, report, and 
cooperate with the SOCO to resolve conflicts of interest. Commenters 
asked that a director or employee not be required to identify conflicts 
of interest when functionally it is the SOCO who has the obligation to 
determine whether there is a conflict. We view the process of reporting 
conflicts of interest as a collaborative one between the director or 
employee making the report and the SOCO. We have made clarifying 
changes to better reflect that process. We have revised the wording in 
final rule Sec.  612.2145(a) to provide that the director or employee 
must identify, disclose, and report any interest or circumstance that 
does or could be a conflict of interest. The rule at Sec.  
612.2170(b)(1) lists helping institution personnel identify conflicts 
as a SOCO responsibility. Next, the rule at Sec.  612.2145(a) requires 
directors and employees to cooperate with the SOCO in identifying if a 
conflict is material or not. The rule elaborates in Sec.  612.2145(b) 
that this includes providing enough information to the SOCO for a 
``reasonable person'' to make a materiality determination. Elsewhere we 
explain that the SOCO will use the institution's SOC program policies 
and procedures to determine materiality. Further guidance on any 
interest or circumstance that might give rise to a conflict of interest 
must be provided in the System institutions' policies and procedures as 
discussed earlier in III.B.3-c of this preamble.
    The Council and a few other commenters specifically asked that 
directors be excused from detailed reporting as they are no longer 
involved in loan approvals. We decline the request. Directors of System 
institutions have ultimate responsibility for all that occurs at the 
institution and are directly involved in hiring the CEO. Directors also 
play a role in credit decisions when setting institution lending 
policies and through service on the institution's credit review 
committee.
4-b. Reporting Conflicts of Interest. [Sec.  612.2145(b)]
    As proposed, annual reporting of interests in business matters, 
names of family members, material financial interests, reportable 
business entities, and persons residing in the home would be required. 
The Council and most associations (or persons and entities affiliated 
with associations) objected to the language on reporting the names of 
family and reportable business entities, stating it is too broad and 
inconsistent with 12 CFR 620.6(e) and (f). The Council and 20 other 
commenters recommended keeping existing regulations in this area and 
explaining how these reports interact with the part 620 annual 
reporting requirements on conflicts of interest for directors and 
senior officers. CoBank and a few other commenters likewise objected to 
reporting requirements on entities, asking to limit it to those with 
current year transactions. Eleven of these also asked that the 
provision be reconciled with how affiliated organizations are reported 
in part 620.
    The reporting requirements of Sec.  612.2145(b) were revised in 
response to comments received. Some changes were made to general areas 
of Sec.  612.2145, but most were specific to certain subject matters 
and we discuss those in the subsections below.
    Additionally, existing language from current Sec. Sec.  612.2145(b) 
and 612.2155(b) was inadvertently omitted from the proposed rule. The 
final rule restores:
     The language requiring directors and employees to file 
conflicts of interest reports with the SOCO that contain the 
disclosures required by this section and the institution's SOC program 
policies and procedures;
     The current provisions of Sec. Sec.  612.2145(b)(2) and 
612.2155(b)(2) regarding the scope of reporting for reportable business 
entities; and
     The current provisions of Sec. Sec.  612.2145(b)(1) and 
612.2155(b)(1) regarding the scope of reporting for family.

[[Page 50969]]

    In response to comments, the final rule also modifies the proposed 
list of minimum report contents as follows:
     Clarifies that ``business matters'' includes loans and 
loan applications.
     Clarifies that ``business matters'' reported must include 
those before the institution, a supervised institution, and a 
supervising institution.
     Limits reported material transactions to those with any 
director, employee, agent or borrower of the institution, or a 
supervised or supervising institution; and
     Clarifies that the report must include gifts received or 
disposed of that are reportable under the institution's SOC program 
policies and procedures.
    As a conforming change to the consolidation of proposed paragraphs 
(a) and (b), this provision is now numbered as Sec.  612.2145(b).
(i) Reporting of Past, Present, and Future Transactions--Paragraph (b)
    The Council, CoBank, FCB of Texas, three commenters from AgFirst, 
and most of those associations commenting expressed concern with being 
required to report all past transactions. These commenters asked that 
only current and new transactions be subject to reporting. We agree 
that the obligation to report should be limited to current and new 
transactions and think that limiting transactions to the current year 
should be sufficient to capture any known or potential conflicts of 
interest. The final rule clarifies that transactional timeframes are 
those occurring in the current year, as that term is defined in the 
institution's SOC program policies and procedures.
(ii) Reporting ``any'' Business Interests--Paragraph (b)(1)
    The Council and FCB of Texas remarked that the requirement to 
report ``any'' interest in ``any'' business matter is too broad. The 
Council recommended moving into the rule text the preamble explanation 
that this provision captures direct and indirect business matters 
pertaining to the System institution, including those occurring through 
an entity. FCB of Texas recommended limiting the requirement to 
interests with System personnel. This commenter added that if we keep 
the provision as proposed, the phrase ``any business matter'' should 
create a link with the initial conflict of interest report. One 
association questioned the need for disclosure of personal 
relationships. In response to the request of some commenters, the final 
rule specifies that only those transactions with the institution or the 
supervising or supervised institution must be reported under paragraph 
(b)(1).
(iii) Reporting Material Financial Interests With System Personnel--
Paragraph (b)(2)
    The Council, three commenters from AgFirst FCB, and several others 
objected to the requirement to report ``all'' material financial 
interests regardless of any System connection, asking the reporting 
expectation to be limited to transactions with System institutions and 
System borrowers. The Council and CoBank asked that this element be 
further limited to reporting only those transactions that are outside 
the ordinary course of business. The Council remarked that without 
these constraints, the reporting requirement would be overly broad and 
burdensome. FCB of Texas said this reporting requirement overlaps with 
those in proposed Sec.  612.2138, asking us to clarify if the intent is 
for both ordinary transactions and those outside the ordinary course of 
business be reported, or just those outside the ordinary course of 
business.
    In Sec.  612.2145(b)(2), a material interest with any director, 
employee, agent, or borrower must be reported, regardless of the nature 
of the interest. We understand this may result in an ordinary course of 
business transaction being reported because the transaction presents a 
conflict or is material in nature. The policies and procedures of the 
System institution should provide further clarification and explain how 
materiality of a conflict is identified.
    FCB of Texas asked that ``business affiliates'' be removed from the 
provision to avoid confusion, while twenty other commenters asked that 
it be defined. The final rule in this area does not contain the phrase 
``business affiliates'' as requested by commenters.
(iv) Reporting Transactions by Reportable Business Entities--Paragraph 
(b)(3)
    The Council asked that reporting on ``reportable business 
entities'' be limited to only where the person holds a material 
interest in an entity that poses a conflict. The Council, FCB of Texas 
and several other commenters suggested following the existing rule 
under Sec.  612.2145(b)(1), which only requires reporting those 
entities doing business with the System. The final rule does not make 
the requested change to only limit entity reporting on a materiality 
standard. We do not think it is necessary to limit reporting on 
``reportable business entities'' to where the person holds a material 
interest in the entity because the term ``reportable business entity'' 
is based on ownership and control. However, the final rule does make 
the requested change to follow existing rules on with whom transactions 
occur that will make them reportable. The final rule limits the listing 
of reportable business entities to those transacting business in the 
current year with the institution, a supervised or supervising 
institution, or a borrower who has business with your System 
institution, or a supervised or supervising institution.
(v) Reporting Family Transactions With the System--Paragraph (b)(4)
    AgFirst FCB remarked that the proposed definition of ``family'' 
would make the reporting requirement unduly burdensome, especially as 
the ``family'' definition does not require a legal relationship. This 
commenter and a few others said the requirement substantially increases 
the workload of the SOCO, who reviews all submissions. AgFirst FCB and 
many others suggested the requirement be limited to reporting family 
members when there is actual knowledge of business transactions with 
the institution. CoBank and several other commenters stated the rule 
was unclear on if extended family needed to be reported and expressed 
support for keeping the current requirement to report only immediate 
family having business with the institution during the reporting year. 
One commenter suggested restricting the scope of family to immediate 
family to reduce the reporting burden and place focus on those family 
members who are most likely to present a risk of undue influence risk 
to the institution director or employee.
    The Council, FCB of Texas and several other commenters objected to 
expanding existing requirements on naming family and placing no time 
constraints on activities to be reported. The Council and several 
others suggested limiting the requirement to transactions occurring in 
the reporting year, including those that ended in the reporting year. 
In the alternative, the Council suggested following the proposed rule 
preamble explanation by leaving the reporting of past business 
transactions to each institution's discretion. FCB of Texas also said 
the transactions being reported should be tied to System transactions 
as is done in existing Sec.  612.2155(b). Three others said reporting 
on family transactions should be limited to when it occurs rather than 
a set time annual timeframe. These commenters suggested keeping the 
existing rule provision requiring positive reporting on family when 
there is actual knowledge.

[[Page 50970]]

    We have changed the definition of family, which was discussed above 
in III.B.1-f of the preamble. In response to comments, we have also 
changed the reporting requirements for family and reportable business 
entities to those ``you know or have reason to know'' and included a 
timeframe of the current year. In response to other comments, the final 
rule modifies the reporting requirements for family to resemble that of 
the current rules in Sec. Sec.  612.2145(b) and 612.2155(b). Reportable 
transactions by family are those occurring in the current year with the 
director's or employee's System institution or any supervised or 
supervising institution. We have chosen not to limit the requirement to 
immediate family, preferring to use the definition of family found in 
Sec.  612.2130. We believe the changes to that definition provide 
sufficient limits while still addressing potentials for conflict to 
arise.
(vi) Persons ``known'' To Do Business With the System--Paragraphs 
(b)(3) and (4)
    The proposed standard for what to disclose as a real or potential 
conflict of interest was ``to the best of your knowledge and belief.'' 
When reporting for family, the proposed standard was supplemented to 
require reporting the name of those family members ``you know or have 
reason to know'' have business with the System. The Council, CoBank and 
some others asked for clarification of whether the proposed reporting 
requirement for family was intended to be more or less restrictive and 
if this same requirement poses a duty to inquire. The Council, FCB of 
Texas and some commenters remarked that combining a knowledge standard 
with a ``reason to know'' standard is contradictory and suggested using 
an actual knowledge standard for this provision or at least clarifying 
the same standard used for all reporting areas. The Council and a few 
others also asked if the ``reason to know'' standard was restricted to 
family reporting. FCB of Texas, CoBank and some other commenters 
recommended we use the existing rule's actual knowledge standard. A 
couple of commenters suggested using ``to the best of knowledge'' as 
not all directors and employees know the financial activities of 
family. The majority of commenters expressed a preference for the same 
standard to be used in all of the proposed reporting items.
    As a director or employee, you should know what interests you have 
in business matters or loan applications that are being considered by 
your institution or supervising institution. However, you may not be 
directly involved in transactions with family members or reportable 
business entities. Therefore, the final rule applies a ``know or have 
reason to know'' standard for reporting on family and reportable 
business entities transactions with the System. The other reportable 
items do not have a similar qualifier.
(vii) Reporting Gifts--Paragraph (b)(5)
    FCB of Texas asked that gift reporting requirements from the SOC 
program elements be moved to this section. We are not moving the gift 
requirements as suggested but have modified the rule to explain the 
report must include reportable gifts received or disposed of that are 
reportable under the institution's SOC program policies and procedures.
4-c. Making Part 620 Disclosures. [Sec.  612.2145(c)]
    The proposed rule would have required all directors and employees 
to make the disclosures required under 12 CFR 620.6(f). The part 620 
provision currently only applies to directors and senior officers. The 
proposal also inadvertently omitted paragraphs (a) and (e) of 12 CFR 
620.6 from this requirement. A few commenters asked that we keep the 
term ``senior officer'' to clarify that reporting on part 620 
disclosures is not being extended to all employees. A few asked if 
institutions have the authority to limit reporting under this provision 
to senior officers and directors and if so, asked that the rule text 
reflect that.
    We agree with comments that the part 620 disclosures only apply to 
directors and officers and make appropriate changes in the final rule. 
The final rule also moves references to reports made under 12 CFR 620.6 
to a new paragraph (c) since those disclosures are only required of 
directors and officers. In conformance with final provisions on the 
SOCO duties discussed in this preamble at III.B.6-b, Sec.  612.2145(c) 
requires directors and officers give the SOCO disclosures required 
under Sec.  620.6(a), (e), and (f). We note that the Sec.  612.2130 
definition of ``officer'' is substantially similar to that of ``senior 
officer'' as used in part 620 and defined in Sec.  619.9310. The final 
rule leaves it to the institution to determine the timing of these 
disclosures, but specifies they must at least occur annually (in 
connection with filing the institution's annual report) and when the 
institution issues an Annual Meeting Information Statement under FCA 
regulations Sec.  620.21(a)(3).
5. Prohibited Conduct. [Sec.  612.2150]
    We proposed consolidating the current prohibited activities for 
directors, employees and joint employees into one section. We also 
proposed incorporating the existing prohibitions on purchasing System 
obligations into this same section. In the process, we proposed 
clarifications and elaborations to existing rule text. We received 45 
comments on the proposed changes to prohibited conduct and the related 
consolidation, including comments from the Council and two FC banks. 
Outside of general comments to keep the existing rule, all the comments 
for this section were directed at a few specific provisions. We make 
some changes to the proposed provisions on prohibited conduct in 
response to comments and to reconcile provisions with changes 
elsewhere, which we discuss in the subsections that follow. We also 
make small changes to improve readability and align the format of the 
rule, such as adding headings to main paragraphs and clarifying 
language. Those changes include:
     Consolidating proposed paragraph (a)(1) into the main 
portion of paragraph (a), renumbering the remaining subordinate 
paragraphs, and adding a new lead to paragraph (a) for the list of 
prohibited activities.
     Adding clarifying language that ``you'' refers to both 
directors and employees.
     Clarifying that the subordinate paragraph on gifts refers 
to prohibited gifts.
     Using consistent language to identify supervising and 
supervised institutions.
     Numbering provisions containing exceptions for ease of 
reference; and
     Only using the term ``family'' since the additional 
language on persons residing in the home is now captured in the 
definition of ``family.''
    In response to general requests that we keep existing section 
numbering where possible, we do not final the proposal to number these 
provisions as Sec.  612.2139. Instead, we have consolidated and moved 
prohibited conduct provisions to the existing section on employee 
prohibited conduct in Sec.  612.2150. The current Sec.  612.2140 
director prohibited conduct numbering is removed and reserved.
5-a. Using Position for Personal Gain. [Sec.  612.2150(a)(1)]
    As proposed, the current director and employee prohibitions on 
participation in matters affecting certain financial interests would be 
retained. The final rule clarifies this prohibition includes

[[Page 50971]]

both direct and indirect effect on financial interests. The final rule 
also retains a sentence from the existing rule that was inadvertently 
omitted in the proposed rule. That sentence prohibits directors and 
employees from using their positions to obtain special advantages for 
themselves, their families and their reportable business entities.
5-b. Accepting Prohibited Gifts. [Sec.  612.2150(a)(3)]
    The proposed language on gifts would prohibit directors and 
employees from soliciting, obtaining or accepting, directly or 
indirectly, any gift, fee or other compensation that could be viewed as 
offered to influence decision-making, or official action or to obtain 
information. The final rule makes minor changes to reconcile the 
provision with the final language on the elements of a SOC program, 
located in Sec.  612.2137, discussing an institution's role in setting 
SOC program policies and procedures for gifts, including limiting the 
blanket gift prohibition to gifts offered because a person serves as a 
director or employee of a System institution.
5-c. Acquired Property. [Sec.  612.2150(a)(4)]
    We proposed keeping the current prohibitions against directors and 
employees knowingly purchasing or otherwise acquiring any interest in 
real or personal property owned by his or her System institution within 
the past 12 months. FCB of Texas asked for an exception to the 12-month 
provision when a third party purchases the property from the 
institution and then sells it by competitive bid within 1 year. The 
Council and CoBank asked if the provision applied to inventory property 
held by a UBE, as was mentioned in the proposed rule preamble but not 
regulatory text. Many commenters offered the general observation that 
items were put in the proposed preamble that should be contained in 
rule text. In some instances, we have agreed with commenter requests 
and in others we have not.
    We stated in the preamble to the proposed rule that the prohibition 
on acquired property would apply to collateral acquired by a System 
institution, including collateral acquired directly or through an 
acquired property UBE. As requested by commenters, the final rule text 
specifically references property held or sold by a UBE or a 4.25 
service corporation. In one of our preamble explanations for this 
section, we said that the acquired property prohibition does not affect 
a director's right of first refusal to inventory property under 12 
U.S.C. 2219a. Commenters asked that this be included in the rule text 
and the final rule adds that exception. As finalized, this paragraph 
sets forth all the exceptions on acquiring institution property in 
subparagraph form: (i) By inheritance, (ii) through the right of first 
refusal, and (iii) when property is sold by public auction. We caution 
that although we do not directly include agents in the acquired 
property prohibition, System institutions should be aware of agent 
conflicts and not allow an agent to purchase acquired property if he or 
she has non-public information (e.g., property type, location, 
condition) of such property that would give him or her an unfair 
advantage over other interested parties.
    One commenter questioned why employees were included in the 
prohibition. The current rule does not exempt employees from this 
prohibition and we did not propose to change that. Unlike directors, 
institution employees are heavily involved in the acquisition and sale 
of acquired properties and thus present real possibility for actual 
conflicts of interest. To minimize the potential for misconduct and the 
burden of institutions augmenting their internal controls and 
monitoring systems, we believe that it is in the best interest of the 
System to keep employees covered by the prohibition.
5-d. Transactions With Prohibited Sources. [Sec.  612.2150(a)(5)]
    We proposed keeping the current limitations on directors and 
employees entering into lending relationships with individuals who may 
have a financial relationship with a System institution, with certain 
exceptions. The FCB of Texas and one other commenter expressed concern 
that the proposed rule does not keep the existing exception for 
transactions with any person residing in the director's or employee's 
household. The final rule retains the existing exemption for family and 
given the final rule also changes the definition of ``family'' to now 
include persons residing in the household, we believe the final rule 
addresses this comment. These same two commenters questioned the 
absence of the existing exception for non-material transactions. These 
comments are directed at the current provision allowing the SOCO to 
determine an otherwise prohibited transaction as permissible because it 
does not involve a material amount of money and the director or 
employee does not participate in the other party's business with the 
institution. We did not propose to keep this exemption based on other 
changes to the subpart and are not otherwise persuaded by the comments 
to now do so. We point out that the final rule retains the prohibited 
transaction exception for ordinary course of business transactions. 
However, the extent to which these transactions will be allowed is for 
each institution to address as part of the SOC program policies and 
procedures.
    The final rule makes minor changes to improve the readability of 
the provision, including breaking the main sentence into two. This 
action separates the language prohibiting financial transactions with 
the institution from those with a borrower of the institution. No 
change in the meaning is intended by this. Also, as mentioned earlier, 
the exceptions to this prohibition are set forth in subparagraph form. 
In making this modification, we identified that an existing exception 
to the prohibition on financial transactions was inadvertently omitted. 
The final rule restores the exception for official transactions 
connected with the institution's relationships with Other Financing 
Institutions.
5-e. System Obligations. [Sec.  612.2150(a)(6)]
    We proposed keeping the current limitations on directors and 
employees purchasing System obligations. The Council, CoBank, and one 
other commenter asked that the prohibition exclude those obligations 
held in a mutual fund or other account where an individual investor is 
not involved in selecting the securities comprising the mutual fund. 
The commenters do not elaborate on if the mutual funds would be 
publicly available or private funds.
    We understand the concern surrounding mutual funds. At this time, 
we are not making the requested change. Because of the complicated 
nature of this request, we will review this issue and possibly include 
it in another rule making action. We remind the commenters that the 
rule does not prevent most System directors and employees \16\ from 
purchasing those System obligations that are part of a public offering 
when bought from members of the Funding Corporation selling group \17\ 
or in the secondary market.
---------------------------------------------------------------------------

    \16\ This exception in the rule does not extend to directors and 
employees of the Funding Corporation.
    \17\ The Funding Corporation works with a selling group of 
approximately 30 investment and dealer banks that provide 
distribution, trading and underwriting capabilities for Farm Credit 
debt securities.

---------------------------------------------------------------------------

[[Page 50972]]

5-f. Employee Only Prohibitions: Joint Employee--Board Service. [Sec.  
612.2139(b)(1) and (4)]
    We proposed retaining most existing joint employment prohibitions 
for employees, but also proposed establishing additional ones. We 
received comments on some of the proposals for this issue and discuss 
them below.
(i) Non-System Entities. [Sec.  612.2150(b)(1)]
    We received sixteen comments on limiting service on the board of 
directors of a non-System entity. Four commenters expressed concern 
with limiting service on other rural boards. Eleven comments discussed 
service on a family-owned company, explaining the current rule allows 
employees to work on family-owned entities but the proposed rule would 
change that to ``reportable business entities'', eliminating many 
family-owned businesses because of the proposed definition of 
``reportable business entity.'' These commenters state the proposed 
change will reduce the employment pool in rural areas and asked FCA to 
keep the exception for family-owned businesses that may not satisfy the 
new meaning of ``reportable business entity.''
    The final rule prohibits serving as a director or employee of any 
commercial bank, savings and loan, or other non-System financial 
institution in all situations. The final rule retains the exception for 
service at an employee credit union. However, the proposed limits on 
serving at an entity transacting business with the institution or 
serving at another System institution in the district are not being 
finalized as proposed. Instead, the prohibition on serving at an entity 
transacting business with the institution or with any institution in 
the district now applies the exceptions for `transacts business with' 
as provided in the rule. Additionally, the final rule further limits 
application of the provision to non-System entities. We believe this 
change provides some of the requested relief but remind commenters that 
the provision is in our current Standards of Conduct rules, so it is 
not a new prohibition.
    In response to comments regarding family businesses that may not 
satisfy the definition of ``reportable business entities'', the final 
rule includes those family businesses as one of the named exceptions to 
the `transacts business with' provision. We recognize that employees 
may work on family-owned entities that do not necessarily meet the 
definition of a ``reportable business entity.'' Without this broader 
exception, employees who assist in family farming operations without 
having a material influence might be prohibited from serving as a 
director or employee of a family operation, which was not our intent. 
Therefore, we have added family-owned entities into the exception. The 
final rule provides that the phrase ``transacts business'', as used in 
this provision, does not include loans by a System institution to a 
family-owned entity or a reportable business entity; service on the 
board of directors of the Federal Agricultural Mortgage Corporation; 
transactions with non-profit entities; or transactions with entities in 
which the System institution has an ownership interest. As a conforming 
change, the final rule removes the sentence cross-referencing the joint 
employment provision of paragraph (b)(4) since it is redundant with the 
final rule language regarding non-System entities.
    As proposed, the current exception allowing an employee of a Farm 
Credit Bank or association to serve as a director of a cooperative that 
borrows from a bank for cooperatives (BCs) would be removed. One 
commenter remarked that the offered reason of mergers for removing this 
exception was not clear, stating there was a need for board members to 
serve cooperatives in small rural areas. The commenter suggested 
limiting prohibitions on board service to System institutions. We agree 
with the commenter that service on a cooperative board would not be a 
conflict in all situations. As such, we do not final the proposed 
removal of the current provision giving an exception for serving as a 
director of a cooperative borrowing from the System under Title III 
authorities. However, the rule updates the current language of this 
provision to recognize that the former BCs merged and now exist within 
CoBank. As a result of a subsequent merger with a Farm Credit Bank, 
CoBank is currently the only institution possessing Title III lending 
authority under the Act. The final rule recognizes there is an obvious 
conflict with employees of CoBank also serving as directors of 
cooperatives borrowing from CoBank. As existed in the current rule, 
this final rule allows System employees--except those employed at 
CoBank--to serve as a director of a cooperative borrowing from the 
System under Title III authorities. This authorization is dependent 
upon the current employing institution approving service on that 
cooperative's board of directors. We expect each institution to 
consider the potential for conflict when approving or disapproving an 
employee request to serve on a cooperative's board, particularly if the 
employee involved works at a System association for which CoBank is the 
funding bank.
(ii) Joint Employees. [Sec.  612.2150(b)(4)]
    We proposed keeping the current joint employee prohibition but with 
an exception to allow certain joint employee relationships. The 
proposed exception would require both boards to authorize the service 
and that the duties and compensation at each institution be delineated 
in the board's approval. The institutions would also provide reasonable 
notice to the FCA beforehand. CoBank expressed support for the changes, 
adding that joint employment between banks and associations does not 
often occur. The Council and CoBank commented that proposed language 
regarding service on the board of other System institutions differs 
from the existing rule. The Council contended that under the existing 
rule an employee may serve on the board of another System institution, 
particularly service corporations, regardless of ownership. Both 
commenters expressed concern that the proposal limits service to only 
those institutions where the employing institution has an ownership 
interest. We also received eight comments from persons affiliated with 
the Foundations service corporation, two from persons associated with 
Farm Start, and 34 letters from association personnel or directors. All 
commented that paragraph (b)(4), as proposed, could be interpreted to 
preclude System institution employees from serving as officers or 
managers of a service corporation or other entity in which a System 
institution has an ownership interest. One commenter specifically 
stated the provision would preclude alliances among System 
institutions.
    The final rule does not contain language requiring or prohibiting 
ownership interest in both institutions when sharing an employee. The 
relevant measure is the relationship between a supervised and 
supervising institution. To prevent potential conflicts, the rule 
prohibits officers from serving simultaneously at both the supervising 
and supervised institutions: Other employees are not similarly 
prevented from this activity. This reflects the current prohibitions 
for banks and association officers, excepting use of the terms 
``supervising'' and ``supervised'' institutions. The definitions of 
these terms as proposed and as contained in this final rule do not 
include service corporations. We believe commenters

[[Page 50973]]

mistakenly relied upon the definition of ``institution'' alone, which 
does include service corporations, when reading this provision. To 
clarify this, we have revised the way this rule text is presented.
    FCB of Texas commented on proposed language regarding notice to FCA 
of the joint employees, asking that it be clarified regarding the terms 
``extraordinary situations'' and ``reasonable prior notice''. FCB of 
Texas suggested removing the latter term, replacing it with a 
requirement for FCA approval. CoBank also commented that ``reasonable 
prior notice'' was vague, asking for clarification or, in the 
alternative, removal of all restrictions on joint employment. FCB of 
Texas also observed this section of the proposed rule used the word 
``officer'' when the word had been proposed for replacement with 
``employee.'' The commenter suggested keeping the term and related 
definition of ``officer.''
    The final rule implements the suggestions of commenters regarding 
FCA involvement in joint employee arrangements. The rule explains that 
in extraordinary circumstances, FCA may approve a non-officer Farm 
Credit bank employee serving as an officer at a supervised institution 
when both institutions have board approval of the joint service and the 
division of the shared employee's duties and compensation are 
identified in the board approval documents. To address the concern over 
the term ``reasonable prior notice'', the final rule changes the 
requirement to send the approval documents to FCA at least 10 business 
days in advance of the joint employment beginning. Comments regarding 
use of the term ``officer'' have been addressed by the final rule 
retaining the definition of ``officer.''
    To incorporate changes made at the suggestion of commenters, the 
layout of paragraph (b)(4) was revised. Now the opening sentence of the 
provision contains the blanket prohibition on serving at a supervised 
or supervising institution. Thereafter, subordinate paragraphs are used 
to identify the two exceptions:
     Serving as a non-officer employee at a Farm Credit bank 
and association when expenses are appropriately divided; or
     Serving as an officer at a supervised association in 
extraordinary circumstances.
Paragraph (b)(4)(ii) also contains the language on obtaining FCA 
approval for the joint employment.
6. Standards of Conduct Official. [Sec.  612.2170]
    We proposed enhancing the role of the Standards of Conduct Official 
(or SOCO) by identifying the SOCO as the point of contact for advice, 
guidance, and reporting on matters related to conflicts of interests. 
We also proposed charging the SOCO with responsibility for training in 
this area and requiring the SOCO to have direct access to an 
institution's board of directors. We received 59 comment letters on the 
role of the SOCO, including comments from the Council and two FC banks. 
Most expressed support, some asked for modifications and ten commenters 
from one association remarked that the listed SOCO responsibilities 
were unreasonable and will make finding a SOCO difficult. Two other 
commenters asked us to keep the existing language of Sec.  612.2170, 
stating the current rule works well and the proposed rule does not 
improve on existing provisions. Some commenters, including FCB of 
Texas, noted that this section is duplicative of other sections, asking 
us to consolidate like provisions.
6-a. SOCO Authority. [Sec.  612.2170(a)]
    In conformance with changes made elsewhere in the rule on defining 
and appointing a SOCO, the final rule adds a new paragraph (a) on the 
authority of the SOCO to administer the program. In response to 
commenters' requests, the final rule also consolidates provisions on 
the SOCO authority to carry out assigned responsibilities, clarifying 
that the SOCO must have access to directors, employees and agents to 
fulfill these duties as well as possess the resources and legal 
authority to do his or her job. This preamble adds the clarification 
that legal authority is directed at the ability to receive confidential 
SOC program communications. This was added because of FCA regulations 
in 12 CFR part 618, subpart G, regarding an institution's 
responsibilities to safeguard its files and records from unauthorized 
disclosure. Under the final rule, the institution board authorizes the 
SOCO to handle these confidential documents as a means of recognizing 
it is necessary for performing official duties of the institution as 
SOCO and therefore permitted under FCA regulation Sec.  618.8300.
    We had proposed as part of the SOCO definition a requirement for 
access to the institution's board of directors. Further, the proposed 
duties of the SOCO included reporting to the institution's board of 
directors or designated board committee any instance of non-compliance 
with the System institution's standards of conduct rules or Code of 
Ethics. Based on comments made elsewhere, we consolidated that language 
to this section.
    Three commenters, including one FC bank, asked that only 
significant or material instances of non-compliance be reported by the 
SOCO to the board. Another commenter asked for clarification that the 
board access did not replace supervisory reporting lines or other 
institution organizational structures. The final rule clarifies that 
the SOCO must have direct access to the board for purposes of 
discussing and reporting on matters related to standards of conduct or 
the Code of Ethics. Information reported by the SOCO is determined by 
each institution's SOC program policies and procedures.
6-b. SOCO Implementation of Standards of Conduct Program. [Sec.  
612.2170(b)]
    As proposed, the SOCO would provide guidance and information to 
directors and employees on conflicts, resolve reported conflicts, 
maintain appropriate documentation and report to the institution's 
board noncompliance with the SOC program. A few commenters stated that 
the SOCO should not be responsible for giving advice, especially not to 
agents, and eighteen commenters objected to language in the proposed 
rule preamble naming the SOCO the authority for giving advice. These 
commenters remarked that the SOCO can provide guidance and information, 
but not advice. Two commenters suggested consolidating the proposed 
language on the SOCO providing guidance with the paragraph on helping 
identify conflicts. One remarked that nothing in this section requires 
the SOCO to identify conflicts of interest, only help others to do so. 
This commenter suggested the SOCO have responsibility for identifying 
and reporting conflicts.
    In conformance with changes made elsewhere in the rule on SOC 
program elements and comments on how a SOCO duties are characterized, 
the final rule consolidates into paragraph (b) various provisions in 
proposed Sec.  612.2170 regarding SOC program administration, making 
some language modifications in response to comments. The consolidation 
results in a list of key duties for the SOCO:
     Providing guidance and aiding in the identification of 
conflicts required to be reported (from proposed paragraph (b));
     Receiving conflicts of interest reports (from proposed 
paragraph (d));

[[Page 50974]]

     Receiving the disclosures required under 12 CFR 620.6(a), 
(e), and (f) as a supplement to any conflicts-of-interest report filed 
under part 612 (from proposed Sec.  612.2138(c)(4) and existing 
standards of conduct reporting requirements at Sec. Sec.  612.2145(a), 
612.2155(a), and 612.2165(b)(12));
     Reviewing and acting upon filed reports, including 
documenting resolution efforts for material conflicts (from proposed 
paragraphs (d), (e), and (f));
     Maintaining SOC program records (from proposed paragraph 
(f));
     Conducting investigations authorized under FCA regulations 
or the institution's SOC program policies and procedures (from existing 
rule text inadvertently omitted); and
     Promptly reporting to the institution's board of directors 
those matters as required under FCA regulations or the institution's 
SOC program policies and procedures (from proposed paragraph (g)). We 
believe the consolidation and clarifications address the general 
comments made on this provision. Below we address more specific 
comments on certain SOCO duties.
(i) Resolving Conflicts
    As proposed, the Standards of Conduct Official would make written 
determinations on how conflicts of interest will be resolved, 
consistent with the System institution's policies and procedures. The 
SOCO would also document resolved and unresolved material or 
significant conflicts of interest. One commenter observed the word 
``significant'' is redundant and confusing. Another commenter 
questioned how the Standards of Conduct Official can resolve a conflict 
when the resolution is to fire the employee or director. One commenter 
remarked that conflict situations are fluid so one set process for 
reporting and addressing the conflicts as proposed is unrealistic. This 
commenter asked to keep resolution processes in the hands of the 
association through the SOC program policies and procedure. The 
commenter also remarked that documenting conflicts is given too much 
importance when focus should be on reporting transactions and financial 
obligations as well as avoiding conflicts.
    The final rule requires the SOCO to review and act upon reports and 
disclosures. In response to comments, we are not finalizing the 
requirement to document ``significant'' conflicts of interest but have 
retained a requirement on making determinations on how conflicts of 
interest will be resolved and documenting material conflicts, whether 
resolved or unresolved. The process of deciding the appropriate 
resolution to a conflict does not always empower the SOCO to enforce 
the resolution, that is dependent upon the institution's SOC program 
policies and procedures as is the resolution process.
(ii) Recordkeeping
    Two commenters observed we had not proposed a record retention 
schedule on reported conflicts within Sec.  617.2170. We talk about 
maintaining SOC program documentation in Sec.  612.2137(a) so do not 
believe it is necessary to repeat it in this section.
6-c. SOCO Training Responsibilities. [Sec.  612.2170(c)]
    In proposed paragraphs (c)(1) through (6), the SOCO would give 
training for the following:
     Procedures for the review of the institution's standards 
of conduct rules and the Code of Ethics, and recommendations of any 
updates;
     Procedures for anonymously reporting known or suspected 
violations of standards of conduct and Code of Ethics and unethical 
conduct;
     Rules for prohibited conduct;
     Fiduciary duties;
     Conflicts of interest and apparent conflicts of interest;
     Reporting requirements; and
     New director and new employee training.

The Council, CoBank and several others commented that the list of items 
was prescriptive and did not consider whether all items would be 
appropriate for both directors and employees. Commenters asked for more 
flexibility to develop appropriate training rather than detailed rules 
on the content of such training. Some commenters specifically asked 
that we remove the requirement for the training to cover revisions to 
an institution's SOC program or Code of Ethics.

    Commenters' concerns with the specificity of the training 
requirements proposed in this section are reasonable. Therefore, the 
final rule does not include the proposed list. We believe this allows 
each System institution the requested flexibility to develop the 
training that meets its needs and improve its ethical culture. We 
clarify that SOC program training could include separate training for 
directors, officers and other employees. We consider our removal of the 
training list as satisfying all other comments asking for changes to 
that list, including comments asking us to change terminology used and 
asking us to restrict training requirements for fiduciary duties to 
directors. We continue to see a need for targeted training for those 
employees with fiduciary duties and strongly encourage each institution 
to devote time to providing that training. The final rule continues to 
require that the SOC program training include updates to the 
institution's Code of Ethics and standards of conduct policies and 
procedures.
    The rule finalizes the proposal to require the SOCO to obtain 
certification of participation from every director and employee taking 
the SOC program training. Comments regarding the format of training 
certifications are addressed in III.B.2-d of this preamble. Also, as 
discussed earlier at III.B.3-e, the final rule relocates most 
provisions on standards of conduct training, including timelines, into 
Sec.  612.2137(f).
6-d. SOCO Investigative Duties. [Sec.  612.2170(d)]
    We did not propose keeping the SOCO's existing responsibilities 
regarding criminal referrals. We received no comments on this change 
but are not finalizing it. At the time of the proposed rulemaking, 
discussions were underway to modify the criminal referral process of 
subpart B of part 612. However, FCA issued Bookletter-073 instead of 
making a rule change,\18\ meaning the SOCO's existing duties for 
criminal referrals need to remain intact. As a result, we are keeping 
the existing requirements of Sec.  612.2170(a)(5) and (6) and (b)(4). 
In coordination with the reorganization of subpart A, we move these 
provisions within Sec.  612.2170 to new paragraph (d). We also make a 
technical correction to a reference currently contained in the existing 
regulations. The reference is changed to direct readers to criminal 
referrals made under subpart B of part 612, instead of part 617. 
Several years ago criminal referral provisions were moved from part 617 
to subpart B of part 612 and the current cross reference should have 
been updated at that time.
---------------------------------------------------------------------------

    \18\ FCA Bookletter ``Criminal Referral Guidance (BL-073)'', 
issued January 19, 2021.
---------------------------------------------------------------------------

7. Standards of Conduct for Agents. [New Sec.  612.2180]
    We proposed removing the current separate provision on standards of 
conduct for agents at Sec.  612.2260. At the request of commenters, we 
are not finalizing that change. The final rule retains this section but 
renumbers it as Sec.  612.2180. Additionally, the final rule makes 
small changes to improve readability and align the format of the 
section with the rest of the rule, such as

[[Page 50975]]

adding headings to main paragraphs and breaking out longer sentences 
into subparagraphs. No change to the current meaning of the rule text 
is intended by these formatting actions.
    The final rule also adds a new paragraph (d) to capture a legal 
change in FCA's authority over ``institution-affiliated parties.'' As 
is discussed earlier in this preamble at III.B.1-a, FCA's enforcement 
authorities were enhanced to give FCA enforcement jurisdiction over 
``institution-affiliated parties'', which definition includes both 
agents and independent contractors of System institutions as well as 
``any other person, as determined by the Farm Credit Administration (by 
regulation or on a case-by-case basis) who participates in the conduct 
of the affairs of a System institution.'' The final rule adds this 
statutory language to the regulations without elaboration or 
interpretation.

IV. Regulatory Flexibility Act and Major Rule Conclusion

    Pursuant to section 605(b) of the Regulatory Flexibility Act (5 
U.S.C. 601 et seq.), FCA hereby certifies that the final rule will not 
have a significant economic impact on a substantial number of small 
entities. Each of the banks in the System, considered together with its 
affiliated associations, has assets and annual income in excess of the 
amounts that would qualify them as small entities. Therefore, System 
institutions are not ``small entities'' as defined in the Regulatory 
Flexibility Act.
    Under the provisions of the Congressional Review Act (5 U.S.C. 801 
et seq.), the Office of Management and Budget's Office of Information 
and Regulatory Affairs has determined that this final rule is not a 
``major rule,'' as the term is defined at 5 U.S.C. 804(2).

List of Subjects in 12 CFR Part 612

    Agriculture, Banks, banking, Conflict of interests, Crime, 
Investigations, Rural areas.
    For the reasons stated in the preamble, part 612 of chapter VI, 
title 12 of the Code of Federal Regulations is amended as follows:

PART 612--STANDARDS OF CONDUCT AND REFERRAL OF KNOWN OR SUSPECTED 
CRIMINAL VIOLATIONS

0
1. The authority citation for part 612 is revised to read as follows:

    Authority:  Secs. 5.9, 5.17, 5.19, 5.31A of the Farm Credit Act 
of 1971, as amended, (Act) (12 U.S.C. 2243, 2252, 2254, 2267a); Sec. 
514 of Pub. L. 102-552, 106 Stat. 4102.


0
2. Subpart A, consisting of Sec. Sec.  661.2130 through 612.2270, is 
revised to read as follows:
Subpart A--Standards of Conduct
Sec.
612.2130 Definitions.
612.2135 Standards of conduct--core principles.
612.2137 Elements of a Standards of Conduct Program.
612.2140 [Reserved]
612.2145 Disclosing and reporting conflicts of interest.
612.2150 Prohibited conduct.
612.2155-612.2165 [Reserved]
612.2170 Standards of Conduct Official.
612.2180 Standards of conduct for agents.
612.2260-612.2270 [Reserved]

Subpart A--Standards of Conduct


Sec.  612.2130  Definitions.

    For purposes of this subpart, the following terms and definitions 
apply excepting that words like document, record, certify, report, 
sign, and write generally should be interpreted to permit their 
electronic equivalents:
    Agent means any person, other than a director or employee of the 
institution, with the power to act for the institution either by 
contract or apparent authority and who currently either represents the 
System institution in contacts with third parties or provides 
professional or fiduciary services to the institution.
    Code of Ethics means a written statement of the principles and 
values the System institution follows to establish a culture of ethical 
conduct for directors and employees, including, at a minimum, the core 
principles established under this subpart.
    Conflicts of interest means a set of circumstances or appearance 
thereof where a person has a financial interest in a transaction, 
relationship, or activity that could or does actually affect (or has 
the appearance of affecting) that person's ability to perform official 
duties and responsibilities in a totally impartial manner and in the 
best interest of the institution when viewed from the perspective of a 
reasonable person with knowledge of the relevant facts.
    Employee means any individual working on a part-time, full-time, or 
temporary basis by the System institution, including those identified 
as officers of the institution. Persons not maintained on the 
institution's payroll (i.e., independent contractors) are not employees 
for purposes of this subpart.
    Entity means a corporation, company, association, firm, joint 
venture, partnership (general or limited), trust (business or 
otherwise) or other business operation whether or not incorporated.
    Family means parents, spouses or civil union partners, children, 
siblings, uncles, aunts, nephews, nieces, grandparents, grandchildren, 
and the spouses of the foregoing, whether arising from biological, 
adoptive, marital, or other legal means (e.g., stepparents, 
stepchildren, half-siblings, in-laws). The term also includes anyone 
residing in the household or who is a legal or financial dependent, 
regardless of any familial relationship.
    Financial interest means an interest in an activity, transaction, 
property, or relationship with a person that involves receiving or 
providing something of monetary value or other present or deferred 
compensation.
    Financially obligated with means having a legally enforceable joint 
obligation with, being financially obligated on behalf of (contingently 
or otherwise), having an enforceable legal obligation secured by 
property owned by another person, or owning property that secures an 
enforceable legal obligation of another.
    Material, when applied to a financial interest or transaction 
(including a series of transactions viewed in the aggregate), means 
that the interest or transaction is of sufficient 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 the person's official duties objectively and 
impartially and in the best interest of the institution and its 
statutory purpose.
    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.
    Officer means the chief executive officer, president, chief 
operating officer, vice president, secretary, treasurer, general 
counsel, chief financial officer, and chief credit officer of the 
System institution, and any person not so designated but who holds a 
similar position of authority.
    Ordinary course of business, when applied to a transaction, means:
    (1) A transaction that is usual and customary in the business in 
question on terms that are not preferential; 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.
    Person means individual or entity (including sole proprietorships).
    Preferential means that the transaction is not on the same terms as 
those prevailing at the same time for comparable transactions for other

[[Page 50976]]

persons who are not directors, employees or agents of a System 
institution.
    Reportable business entity means an entity in which the reporting 
individual, directly or indirectly, or acting through or in concert 
with one or more persons:
    (1) Owns a material percentage of the equity;
    (2) Owns, controls, or has the power to vote a material percentage 
of any class of voting securities; or
    (3) Has the power to exercise a material influence over the 
management of policies of such entity from his or her status as a 
partner, director, officer, or majority shareholder in the entity.
    Resolved means an actual or apparent conflict of interest that has 
been addressed with an action such as recusal, divestiture, approval or 
exception, job reassignment, employee supervision, employment 
separation or other action, with the result that a reasonable person 
with knowledge of the relevant facts would conclude that the 
conflicting interest is unlikely to adversely affect the person's 
performance of official duties in an objective and impartial manner and 
in furtherance of the interests and statutory purposes of the Farm 
Credit System.
    Standards of Conduct Official or ``SOCO'' means a person appointed 
by the institution's board of directors pursuant to this subpart to 
administer and report on the institution's Standards of Conduct 
Program, as well as investigate allegations of misconduct by 
institution directors, employees or agents.
    Standards of Conduct Program or SOC program means the policies and 
procedures, internal controls and other actions a System institution 
must implement to put into practice the requirements of this subpart.
    Supervised institution is a term that only applies within the 
context of a Farm Credit bank or employee of a Farm Credit bank and 
refers to each association supervised by that Farm Credit bank.
    Supervising institution is a term that only applies within the 
context of an association or employee of an association and refers to 
the Farm Credit bank that supervises that association.
    System institution and institution means any Farm Credit System 
bank, association, or service corporation chartered under section 4.25 
of the Act, and the Funding Corporation. It does not include the 
Federal Agricultural Mortgage Corporation.


Sec.  612.2135  Standards of conduct--core principles.

    (a) Conduct. If you are a System institution director or employee, 
you must:
    (1) Maintain high ethical standards, including high standards of 
care, honesty, integrity, and fairness.
    (2) Act in the best interest of the institution.
    (3) Preserve the reputation of the institution and the public's 
confidence in the Farm Credit System.
    (4) Exercise diligence and good business judgment in carrying out 
official duties and responsibilities.
    (5) Report to the Standards of Conduct Official conflicts of 
interest and circumstances or transactions that have the appearance of 
creating a conflict of interest involving yourself, your family, or 
your reportable business entity.
    (6) Work with the Standards of Conduct Official to identify 
conflicts and resolve reported conflicts of interest and appearances of 
conflicts of interest.
    (7) Avoid self-dealing and acceptance of gifts or favors that may 
be deemed as offered, or have the appearance of being offered, to 
influence official actions or decisions.
    (b) Responsibilities. To achieve the high standards of conduct of 
this subpart, every institution director and employee must:
    (1) Comply with the standards of conduct and Code of Ethics 
policies and procedures maintained at his or her institution.
    (2) Comply with all applicable laws and regulations.
    (3) Timely report to the Standards of Conduct Official, or use the 
institution's anonymous reporting procedures, any known or suspected:
    (i) Illegal or unethical activity; or
    (ii) Violation of the institution's standards of conduct and Code 
of Ethics.
    (c) Fiduciary duties. Every officer or director of a System 
institution must fulfill his or her fiduciary duties to the institution 
and its stockholders.


Sec.  612.2137  Elements of a Standards of Conduct Program.

    Each System institution board of directors is ultimately 
responsible for the implementation, oversight of, and compliance with, 
the Standards of Conduct Program. In fulfilling these responsibilities, 
each System institution board of directors must do the following:
    (a) Establish a SOC program. Each institution's board of directors 
must establish and maintain a Standards of Conduct Program that sets 
forth the core principles of Sec.  612.2135 and meets the requirements 
of this subpart. The board must act to ensure the SOC program has 
adequate resources for its implementation and operation. The SOC 
program must include maintaining conflicts of interest and other 
reports required under this subpart, along with any investigations, 
determinations, and supporting documentation, for a minimum of 6 years.
    (b) Appoint a Standards of Conduct Official. Each institution must 
have a Standards of Conduct Official who is appointed pursuant to Sec.  
612.2170. An institution may use one of its officers to serve as SOCO 
or may use a chartered service corporation or third-party to provide 
the services of a SOCO. Institutions may also use another institution's 
SOCO or hire a SOCO under a shared contract with other System 
institutions when each institution has a separate confidential 
relationship with the person serving as SOCO.
    (c) Adopt a written Code of Ethics. Each institution as part of its 
SOC program must adopt and maintain an up-to-date written Code of 
Ethics. The Code must establish the institution's values and 
expectations for the ethical conduct of directors and employees in 
business transactions and include a general statement of expectations 
for appropriate professional conduct. The entire Code of Ethics must be 
available to all directors, employees, agents, and shareholders of the 
institution. The institution must post on its external website a 
statement that it has adopted a professional Code of Ethics, 
summarizing what that Code is, and advising the public the entire Code 
of Ethics is available on request at no cost.
    (d) Establish Standards of Conduct policies and procedures. Each 
institution's board of directors must adopt policies and procedures to 
implement the institution's SOC program. These policies and procedures 
must address all aspects of the SOC program, including, but not limited 
to, the following:
    (1) Requiring conflict of interest reporting from all directors and 
employees pursuant to Sec.  612.2145. The frequency of conflicts of 
interest reporting and other disclosures must be addressed in SOC 
program policies and procedures using the institution's fiscal year 
calendar. At a minimum, each person must annually report to the SOCO 
known conflicts occurring in the current year. Pursuant to Sec.  
612.2145(c), the board must also require directors and officers to give 
the SOCO the disclosures required under Sec.  620.6(a), (e), and (f) of 
this chapter, regardless of

[[Page 50977]]

who else in the institution receives the disclosures.
    (2) Explaining what constitutes SOC program compliance, including 
setting criteria for documentation submitted with conflicts of interest 
reports and providing instructions to help directors and employees 
identify and report on interests or circumstances that could give rise 
to an actual or apparent conflict of interest.
    (i) The board must explain within the policies and procedures what 
transactions are likely to present real or potential conflicts, setting 
benchmarks and thresholds for both single and aggregate activities. The 
policies and procedures must also explain how transactions in the 
ordinary course of business are identified.
    (ii) The board must explain within the policies and procedures, 
setting benchmarks and thresholds, how materiality of a conflict is 
identified. The materiality guidelines must be used when evaluating 
conflicts of interest reports filed by employees and directors. An 
exception for those matters affecting all shareholders or borrowers may 
be used in making the determination of materiality.
    (3) Addressing the process by which real and apparent conflicts 
will be resolved. The procedures must also explain action(s) to be 
taken when a conflict cannot be resolved to the satisfaction of the 
institution. The procedures must explain the role and authorities of 
the SOCO in resolving conflicts.
    (4) Addressing the conduct of third-party relationships. The board 
of directors at each institution must adopt conflict-of-interest 
policies for third-party relationships and develop safeguards for use 
in contractual obligations that require third-party service providers 
to perform services on behalf of the institution in an ethical manner. 
At a minimum, the policies for third-party relationships must set forth 
expectations for disclosing known conflicts of interest to the 
institution. The policies must also implement the requirements of Sec.  
612.2180 for agents of the institution.
    (5) Setting criteria for accepting gifts that are not otherwise 
prohibited by this subpart. The criteria must explain the scope of 
application and may make appropriate exceptions for non-business events 
where the gift is not viewed by the institution as attempting to 
influence official institution business. The gift criteria must include 
de minimis dollar thresholds for all permissible gifts, regardless of 
the gift giving reason. The thresholds must apply both per gift and in 
the aggregate per recipient, per year. The institution must also 
establish disclosure requirements for gifts received as well as 
procedures for disposing of impermissible gifts.
    (6) Identifying the appropriate actions that may be taken against 
any director or employee who violates the standards of conduct policies 
and procedures, Code of Ethics, or regulations under this subpart. The 
board must also identify who is authorized to take which action and 
when. The board must address how the SOCO exercises his or her 
authority under Sec.  612.2170 to investigate certain conduct issues.
    (7) Providing for anonymous reporting by individuals of known or 
suspected violations of the institution's Standards of Conduct Program 
and Code of Ethics, through a hotline or other venue.
    (e) Monitor the SOC program through internal controls. Each 
institution's board of directors must establish a system of internal 
controls for its SOC program that includes, at a minimum, a process to:
    (1) Protect against unauthorized disclosure of confidential 
information maintained by the institution.
    (2) Conduct scheduled periodic reviews of the Standards of Conduct 
Program that determine the continued adequacy of the program. Each 
review must look for consistency with institution practices, financial 
services industry best practices, and Farm Credit Administration (FCA) 
regulations in this chapter, identifying any required updates.
    (3) Perform internal audits of the Standards of Conduct Program. 
The board of directors, with the assistances of the SOCO and 
appropriate officers of the institution, must determine the scope and 
depth of the audit. The board is responsible for identifying who will 
conduct the internal audit. The audit findings must be given directly 
to the institution's board or designated board committee. The audit 
itself must be designed to:
    (i) Review the effectiveness of advancing the core principles;
    (ii) Identify weaknesses;
    (iii) Recommend and report necessary corrective actions; and
    (iv) Cover the entire Standards of Conduct Program across the 
institution, including all activities conducted through a System 
institution unincorporated business entity (UBE) formed under Sec.  
611.1150(b) of this chapter, including UBEs organized for the express 
purpose of investing in a Rural Business Investment Company.
    (f) Train institution personnel. Each institution's board of 
directors must establish a training program to administer periodic 
Standards of Conduct and Code of Ethics training to directors and 
employees. The training must be given by the SOCO and the board must 
address how the SOCO will exercises his or her training 
responsibilities under Sec.  612.2170. The Standards of Conduct 
training must be administered under the following timeframes:
    (1) Newly elected or appointed directors must receive Standards of 
Conduct training within 60 calendar days of the director assuming his 
or her position.
    (2) New employees must receive Standards of Conduct training within 
10 business days of beginning work.
    (3) Periodic training for all directors and employees must occur at 
least annually but may be more frequent.


Sec.  612.2140  [Reserved]


Sec.  612.2145  Disclosing and reporting conflicts of interest.

    (a) Responsibilities. As a director or employee of a System 
institution you must identify, disclose, and report on any interest or 
circumstances that does or could constitute a conflict of interest and 
potential conflict of interest. You must carry out this responsibility 
to the best of your knowledge and belief. You must cooperate with, and 
provide information requested by, the Standards of Conduct Official for 
use in determining the materiality of a conflict and to resolve 
conflicts of interest and potential conflicts of interest.
    (1) If you have a conflict of interest in a matter, transaction, or 
activity subject to official action by the institution or before the 
board of directors then you must disclose it and refrain from 
participating in official action or board discussion of the matter, 
transaction, or activity. You must also avoid voting on or influencing 
any decision directed at the matter, transaction, or activity.
    (2) You must report, either to the SOCO or by using the 
institution's anonymous reporting procedures, any known or suspected 
activity by a person affiliated with the institution that you suspect 
is illegal, unethical, or a violation of the institution's standards of 
conduct and Code of Ethics.
    (b) Reporting conflicts of interest. As a director or employee of a 
System institution, you must file with the SOCO reports on any real or 
potential conflicts of interest. The reports must be filed at least 
annually and at such other times as may be required by your institution 
policies and procedures. The reports must be in sufficient detail for a 
reasonable person to make a conflict of interest determination and 
decide if the

[[Page 50978]]

conflict is material. You must file a report with the SOCO that 
contains the disclosures required by this section and those required by 
the institution's SOC program policies and procedures. At a minimum, 
the report must be signed by you and include:
    (1) Any interest you have in any business matter, including any 
loan or loan application, to be considered by the System institution, 
or supervised or supervising institution in the current year;
    (2) All material financial interests, including those arising in 
the ordinary course of business, you have with any director, employee, 
agent, or borrower of your System institution, or a supervised or 
supervising institution;
    (3) The name(s) of your reportable business entities that you know 
or have reason to know in the current year transacted business with:
    (i) Your System institution;
    (ii) Any supervised or supervising institution; or
    (iii) A borrower that transacts business with your System 
institution, or any supervised or supervising institution.
    (4) The name(s) of your family members you know or have reason to 
know transacted business with your System institution or any supervised 
or supervising institution in the current year.
    (5) Reportable gifts received or disposed of under the 
institution's SOC program policies and procedures.
    (c) Other required disclosures for directors and officers. If you 
are a director or officer at the institution, you must give the SOCO 
the disclosures required under Sec.  620.6(a), (e), and (f) of this 
chapter, regardless of who else in the institution has been provided 
them. The timing and frequency of disclosing the information to the 
SOCO, or any updates to them, is determined by your institution's SOC 
program policies and procedures but must occur no less than annually 
and at issuance of the institution's Annual Meeting Information 
Statement.


Sec.  612.2150  Prohibited conduct.

    (a) General. If you are a System institution director or employee 
you must not act inconsistently with the Standards of Conduct core 
principles set forth in this subpart. You also must not act in the 
following manner:
    (1) Use your position for personal gain or advantage. Do not 
participate in deliberations on, or the determination of, any matter 
affecting your financial interest either directly or indirectly. 
Matters affecting your financial interest include financial interests 
of family or reportable business entities. You also may not use your 
position as a director or employee of the institution to obtain special 
advantage or favoritism for yourself, your family, or a reportable 
business entity. However, you may participate in matters of general 
applicability affecting shareholders or borrowers of a particular class 
if your participation occurs in a nondiscriminatory way.
    (2) Divulge confidential information. Do not make use of or 
disclose any fact, information, or document not generally available to 
the public that you acquired by virtue of your position as a director 
or employee of the institution. You may use confidential information in 
the performance of your official duties.
    (3) Accept prohibited gifts. Do not solicit, obtain, or accept 
(directly or indirectly), any gift, fee, or other compensation that is 
offered or requested based on your position as a director or employee 
of an institution if it could be viewed as being offered to influence 
your decision-making, an official action, or to obtain information 
related to your institution's operations.
    (4) Purchase property owned by the institution. Do not knowingly 
purchase or otherwise acquire (directly or indirectly) any interest 
(including mineral interests) in any real or personal property that 
currently is owned, or within the past 12 months was owned, by your 
institution, your supervising institution, or institutions supervised 
by your institution as a result of foreclosure, deed in lieu, or 
similar action. The prohibition in this paragraph (a)(4) extends to 
property held or sold by a chartered service corporation or a System 
unincorporated business entity. The prohibition does not apply in the 
following situations:
    (i) You acquire the property by inheritance.
    (ii) You are exercising your rights of first refusal under section 
4.36 of the Act.
    (iii) If you are a director of the institution, you may purchase 
property from a System institution when the property is sold through 
public auction or similar open, competitive bidding process. The 
exception in this paragraph (a)(4)(iii) only applies if you did not 
participate in the decision to foreclose upon the property nor did you 
participate in deciding how the institution would dispose of the 
property. Participating in these decisions includes setting the sale 
terms or receiving information as a result of your position with the 
institution that could give you an advantage over other potential 
bidders or purchasers of the property.
    (5) Enter into transactions with prohibited sources. Do not 
directly or indirectly borrow from, lend to, or become financially 
obligated with or on behalf of a director, employee, or agent of your 
institution, your supervising institution, or institution supervised by 
your institution. You are also prohibited from directly or indirectly 
borrowing, lending to, or becoming financially obligated with or on 
behalf of a borrower or loan applicant of your institution. The 
transaction prohibition does not apply to:
    (i) Transactions with family members.
    (ii) Transactions that occur in the ordinary course of business as 
determined and documented by the written policies and procedures of 
your institution.
    (iii) Transactions undertaken in an official capacity and in 
connection with the institution's discounting, lending, or 
participation relationships with other financing institutions (OFIs) 
and other lenders.
    (6) Purchase System obligations. Do not purchase any obligation of 
a System institution, including any joint, consolidated or System-wide 
obligation, unless such obligation is part of an offering available to 
the public and you either purchase it through a dealer or dealer bank 
affiliated with a member of the selling group designated by the Funding 
Corporation or purchase it in the secondary markets.
    (i) Do not purchase or retire any stock in advance of the release 
of material, non-public, information concerning the institution to 
other stockholders.
    (ii) If you are a director or employee of the Funding Corporation, 
do not purchase or otherwise acquire, directly or indirectly, except by 
inheritance, any obligation or equity of a System institution, 
including any joint, consolidated or System-wide obligations, unless it 
is a common cooperative equity as defined in Sec.  628.2 of this 
chapter.
    (b) Employees only. In addition to the prohibitions under paragraph 
(a) of this section, if you are an institution employee you must not:
    (1) Serve as a director or employee of certain entities. Do not 
serve as a director or employee of any commercial bank, savings and 
loan, or other non-System financial institution. You may not serve as a 
director or employee of a non-System entity that transacts business 
with a System institution within your institution's district unless 
specifically allowed in this paragraph (b). For the purpose of this 
paragraph (b)(1), ``transacts business'' does not include loans by a 
System institution to a family-owned entity or a reportable

[[Page 50979]]

business entity; service on the board of directors of the Federal 
Agricultural Mortgage Corporation; transactions with non-profit 
entities; or transactions with entities in which the System institution 
has an ownership interest. The prohibition in this paragraph (b)(1) 
does not apply in the following situations:
    (i) You may serve as a director or employee of an employee credit 
union.
    (ii) You may serve as a director of a cooperative that borrows from 
the System under the Act's Title III authorities if you are not 
employed at an institution with Title III lending authority and your 
employing institution approves your service on the cooperative's board.
    (2) Act as a real estate agent or broker. Do not act as a real 
estate agent or broker unless you are buying or selling real estate for 
your own use or for family.
    (3) Act as an insurance agent or broker. Do not act as an insurance 
agent or broker for the sale and placement of insurance, unless 
authorized by section 4.29 of the Act.
    (4) Serve as a joint employee. Do not serve as an employee for your 
supervising institution if you are an officer at your association. Do 
not serve as an employee for a supervised institution if you are an 
officer at your Farm Credit bank. The prohibition in this paragraph 
(b)(4) does not apply in the following situations:
    (i) You may be both a non-officer employee at a Farm Credit bank 
and a supervised association if the employment expenses are 
appropriately reflected in each institution's financial statements.
    (ii) If you are currently employed with a Farm Credit bank as other 
than an officer, in extraordinary circumstances, FCA may approve your 
serving as an officer of a supervised association. This requires the 
boards at both institutions to agree to the joint service and for the 
duties and compensation at each institution to be delineated in the 
board approval documents. The board documents, along with the request, 
must be sent at least 10 business days before the effective date to the 
Director of Regulatory Policy, Farm Credit Administration.


Sec. Sec.  612.2155-612.2165  [Reserved]


Sec.  612.2170  Standards of Conduct Official.

    (a) Authority. The Standards of Conduct Official must be appointed 
by the board of directors for the institution and the board of 
directors must empower the appointed SOCO with all of the following:
    (1) Direct access to the board (or designated board committee) for 
the purpose of discussing and reporting on matters related to the 
institution's Standards of Conduct Program and Code of Ethics;
    (2) Authority to carry out the responsibilities set forth in this 
section;
    (3) Accessibility to all directors, employees, and agents of the 
institution;
    (4) Legal authority to receive confidential SOC program 
communications from all directors, employees, and agents of the 
institution; and
    (5) Resources adequate for implementing a successful Standards of 
Conduct Program.
    (b) Program administration. The Standards of Conduct Official must 
implement the institution's Standards of Conduct Program as determined 
by the written policies and procedures of his or her institution and 
FCA regulations in this chapter. This may include, but is not limited 
to, the following:
    (1) Providing guidance and information to directors and employees 
on conflicts of interest, including aiding in the identification of 
reportable conflicts of interest and reportable financial interests in 
accordance with this subpart;
    (2) Receiving reports required under this subpart from directors, 
employees, and agents;
    (3) Receiving from directors and officers the disclosures required 
under Sec.  620.6(a), (e), and (f) of this chapter for treatment as a 
supplement to an individual's conflicts of interest report;
    (4) Reviewing and acting upon all SOC program reports and 
disclosures, including documenting resolved and unresolved conflicts of 
interest that are material, and making written determinations on how 
conflicts of interest will be resolved;
    (5) Maintaining all SOC program records for the required period of 
time, including documentation that explains how conflicts are being 
handled;
    (6) Conducting investigations as either authorized under this 
subpart or by the institution's SOC program policies and procedures;
    (7) Reporting promptly to the institution's board of directors (or 
designated board committee) those SOC program or Code of Ethics matters 
required by the institution's SOC program policies and procedures or 
FCA regulations in this chapter; and
    (8) Reporting to the institution's board of directors those 
activities investigated pursuant to paragraph (d) of this section.
    (c) Training duties. The Standards of Conduct Official must give 
standards of conduct training to all directors and employees at the 
institution. The training must comply with the requirement of Sec.  
612.2137 and the institution's Standards of Conduct policies and 
procedures. In addition to other matters, periodic training must cover 
updates or revisions to the institution's SOC program and Code of 
Ethics. The SOCO must obtain written participation certifications from 
every director and employee taking the training.
    (d) Investigative duties. The Standards of Conduct Official is 
responsible for investigating complaints alleging misconduct or 
possible criminal behavior by the institution, its directors, or its 
employees.
    (1) At a minimum, the Standards of Conduct Official must 
investigate, or cause to be investigated, all cases involving:
    (i) Possible violations of criminal statutes;
    (ii) Possible violations of director or employee prohibited conduct 
regulations in Sec.  612.2150, and the applicable institution policies 
and procedures;
    (iii) Complaints of misconduct received against directors and 
employees of the institution;
    (iv) Possible violations of other provisions of this part; and
    (v) Suspected activities of a sensitive nature which could affect 
continued public confidence in the Farm Credit System.
    (2) The SOCO serves as the reporting official for all cases 
investigated under subpart B of this part (criminal referrals). In this 
capacity, the SOCO must report to both the institution's board and the 
Farm Credit Administration's Office of General Counsel 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.


Sec.  612.2180  Standards of conduct for agents.

    (a) Agents. Agents of System institutions must 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) Institutions. Each institution must use safe and sound business 
practices in

[[Page 50980]]

the engagement, utilization, and retention of agents. These practices 
shall provide for the selection of qualified and reputable agents. The 
institution is responsible for the administration of relationships with 
its agents and must take appropriate investigative and corrective 
action in the case of a breach of fiduciary duties by an agent or 
failure of an agent to carry out other duties as required by contract, 
FCA regulations in this chapter, or law.
    (c) Control. System institutions are responsible for exercising 
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:
    (1) The employment of agents who are related to directors or 
employees of the institutions;
    (2) The solicitation and acceptance of gifts, contributions, or 
special considerations by agents; and
    (3) The use of System and borrower information obtained in the 
course of the agent's work with the institution.
    (d) Enforcement. Agents of System institutions are ``institution-
affiliated parties'' as that term is defined in the Act and therefore 
subject to certain FCA enforcement authorities contained in part C of 
title V of the Act. An ``institution-affiliated party'' is:
    (1) A director, officer, employee, shareholder, or agent of a 
System institution;
    (2) An independent contractor (including an attorney, appraiser, or 
accountant) who knowingly or recklessly participates in:
    (i) A violation of law (including regulations) that is associated 
with the operations and activities of one or more System institutions;
    (ii) A breach of fiduciary duty; or
    (iii) An unsafe practice that causes or is likely to cause more 
than a minimum financial loss to, or a significant adverse effect on, a 
System institution; or
    (3) Any other person, as determined by the Farm Credit 
Administration (by regulation or on a case-by-case basis) who 
participates in the conduct of the affairs of a System institution.


Sec. Sec.  612.2260-612.2270  [Reserved]

    Dated: August 23, 2021.
Dale Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2021-18432 Filed 9-10-21; 8:45 am]
BILLING CODE 6705-01-P