Standards of Conduct

Published date13 September 2021
Citation86 FR 50956
Record Number2021-18432
SectionRules and Regulations
CourtFarm Credit Administration
Federal Register, Volume 86 Issue 174 (Monday, September 13, 2021)
[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 IIFarm Credit Administration-----------------------------------------------------------------------12 CFR Part 612Standards 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
                [[Page 50958]]
                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
                [[Page 50959]]
                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
                

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