[Federal Register Volume 79, Number 34 (Thursday, February 20, 2014)]
[Proposed Rules]
[Pages 9649-9661]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-03098]


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FARM CREDIT ADMINISTRATION

12 CFR Part 612

RIN 3052-AC44


Standards of Conduct and Referral of Known or Suspected Criminal 
Violations; Standards of Conduct

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

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SUMMARY: The Farm Credit Administration (FCA, we, or our) proposes to 
amend its regulations governing standards of conduct of directors, 
employees, and agents of Farm Credit System (System) institutions, 
excluding the Federal Agricultural Mortgage Corporation. The amendments 
would clarify and strengthen reporting requirements and prohibitions, 
require institutions to establish a Code of Ethics, and enhance the 
role of the Standards of Conduct Official.

DATES: You may send comments on or before May 21, 2014.

ADDRESSES: We offer a variety of methods for you to submit your 
comments. For accuracy and efficiency reasons, commenters are 
encouraged to submit comments by email or through the FCA's Web site. 
As facsimiles (fax) are difficult for us to process and achieve 
compliance with section 508 of the Rehabilitation Act, we are no longer 
accepting comments submitted by fax. Regardless of the method you use, 
please do not submit your comment multiple times via different methods. 
You may submit comments by any of the following methods:
     Email: Send us an email at reg-comm@fca.gov.
     FCA Web site: http://www.fca.gov. Select ``Public 
Commenters,'' then ``Public Comments'' and follow the directions for 
``Submitting a Comment.''
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail: Barry F. Mardock, Deputy Director, Office of 
Regulatory Policy, Farm Credit Administration, 1501 Farm Credit Drive, 
McLean, Virginia 22102-5090.
    You may review copies of comments we receive at our office in 
McLean, Virginia, or from our Web site at http://www.fca.gov. Once you 
are in the Web site, select ``Public Commenters,'' then ``Public 
Comments'' and follow the directions for ``Reading Submitted Public 
Comments.'' We will show your comments as submitted but, for technical 
reasons, we may omit items such as logos and special characters. 
Identifying information that you provide, such as phone numbers and 
addresses, will be publicly available. However, we will attempt to 
remove email addresses to help reduce Internet spam.

FOR FURTHER INFORMATION CONTACT:
Jacqueline R. Melvin, Policy Analyst, Office of Regulatory Policy, Farm 
Credit Administration, McLean, VA 22102-5090, (703) 883-4498, TDD (703) 
883-4056,
or
Mary Alice Donner, Senior Counsel, Office of General Counsel, Farm 
Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TDD (703) 
883-4056.

SUPPLEMENTARY INFORMATION:

I. Objectives

    The objectives of this proposed rule are to:
     Clarify and strengthen the regulations in part 612, 
subpart A, regarding standards of conduct;
     Modify definitions;
     Clarify reporting requirements and prohibitions on the 
purchase of System institution acquired property and lending 
transactions;
     Strengthen responsibility and accountability requirements 
for System institution Standards of Conduct Officials, boards of 
directors (or board), employees, and agents; and
     Require each System institution to adopt a Code of Ethics.
    The FCA has not made significant changes to its standards of 
conduct regulations since 1994, and we have determined that it is 
appropriate to strengthen and modernize the rule. The proposed rule 
would add new provisions, clarify and augment some of the current 
provisions and provide additional flexibility for others. The proposed 
rule is organized differently from the current rule. Sections on 
director and employee reporting and prohibited conduct are repositioned 
to improve the logical flow of the rule. The proposed rule adds a new 
Sec.  612.2136 on conflicts of interest, a new Sec.  612.2165(a) on 
Code of Ethics, a new Sec.  612.2165(c) on allowing exceptions to 
certain rules if no conflict of interest exists, and new requirements 
in Sec.  612.2180 addressing standards of conduct for agents. It also 
adds new standards of conduct responsibilities to System institutions 
(proposed Sec.  612.2160) and to the Standards of Conduct Official 
(proposed Sec.  612.2170). We solicit comments on our proposed 
amendments.

II. Section-by-Section Analysis

A. Definitions [Sec.  612.2130]

    The proposed rule would have some new and some modified 
definitions:
    Code of Ethics. The proposed rule would define ``Code of Ethics'' 
as a written set of standards, rules, values, and guidance that an 
institution uses to ensure the ethical conduct of those who sign it, 
and that reflects professionalism and discourages misconduct so the 
best interests of the institution are advanced.
    Controlled entity and entity controlled by. The proposed rule would 
continue to provide that a controlled entity includes an interest in an 
entity in which the individual, directly or indirectly or acting 
through or in concert with one or more persons, owns 5 percent or more 
of the equity of the entity; owns, controls, or has the power to vote 5 
percent or more of any class of voting securities of the entity; or has 
the power to exercise a controlling influence over the management of 
the entity. The FCA is aware that in other contexts the definition of 
``controlled entity'' or ``entity controlled by'' may mean having an 
ownership interest with a greater threshold than 5 percent; however, 
the purpose of this rule is to ensure that institution directors and 
employees are completely objective in their decision-making, and are 
not in any way influenced by personal interests. The FCA believes that 
a

[[Page 9650]]

reasonable person could conclude that a director or employee could be 
influenced to act favorably toward an entity in which he or she had an 
economic interest of 5 percent or more. Therefore, directors and 
employees should report these interests and should abstain from 
decision-making with regard to them. So, for the purpose of this rule 
only, a ``controlled entity'' or ``entity controlled by'' is defined as 
an entity in which the director or employee has an interest of 5 
percent or more, alone or in concert with others, directly or 
indirectly.
    Employee. The proposed rule would clarify the definition of 
``employee'' to include non-salaried employees such as hourly wage 
earners.
    Entity. The proposed rule would add unincorporated business 
entities to the definition of ``entity''.
    Family. The proposed rule would add to the current definition of 
``family'' associations or relationships that are in the nature of a 
family relationship. This is intended to modernize the definition of 
family to include non-traditional relationships, and adoptions and 
other relationships where an adult who is not related to a child acts 
as a parent to a child living in the home. Each System institution is 
encouraged to provide more explanation and discussion of the regulatory 
definition in its standards of conduct policies and procedures.
    Material. The proposed rule would not change the definition of 
``material.'' However, each System institution must set specific 
parameters on what constitutes a material financial interest or 
transaction. The value of a material financial interest or transaction 
may change depending on the circumstances and, to some extent, the 
geographic location of the institution involved. The institution's 
determination of materiality would be subject to FCA examination.
    The institution's policies and procedures may include de minimis 
values below which a financial interest is determined by the board not 
to be material. The de minimis amount is necessarily System 
institution-specific, and must be appropriate to the institution's 
size, location and risk tolerance. A de minimis amount is an amount or 
value representing an interest that is so insignificant that no 
reasonable person could conclude that it would influence a director or 
employee's ability to act impartially and in the best interests of the 
System institution. The institution would need to adequately support 
the values established in its determination of de minimis or not 
material, and this determination would be subject to FCA examination.
    Officer. We propose to replace ``secretary'' with corporate 
secretary.
    Ordinary course of business. We propose to remove ``two'' 
concerning transactions between persons and add ``agents'' to those for 
whom preferential treatment should be avoided.
    Signed. We would add a definition of ``signed'' to have the same 
meaning as set forth in Sec.  620.1 of the chapter, to provide for 
greater uniformity in our regulations and to clarify electronic 
signatures are acceptable.
    Unincorporated business entities. We would add a definition of 
``unincorporated business entities'' to have the same meaning as set 
forth in Sec.  611.1151 of the chapter.

B. Director and Employee Responsibilities and Conduct--Generally 
[Proposed Sec.  612.2135]

    The section heading would be replaced with ``responsibilities and 
conduct'' but otherwise this section is not substantively changed. The 
words ``and guidance'' are added to paragraph (b) to make clear that in 
addition to regulations, policy statements, instructions and 
procedures, directors and employees must observe guidance of the FCA, 
to the best of their abilities.

C. Conflicts of Interest [Proposed Sec.  612.2136]

    The proposed rule would add a new Sec.  612.2136 on conflicts of 
interest. This section is added to require directors, employees, and 
agents to take affirmative action to report conflicts of which they are 
aware. It is intended to compel them to take ownership of and invest in 
their ethical responsibilities. Paragraph (a) would specifically 
require directors, employees, and agents to disclose any conflicts of 
interests they may have in any matters, activities or transactions 
pending at the System institution to the Standards of Conduct Official. 
It would require immediate reporting of conflicts of interests and 
would supplement employee's and director's existing annual and periodic 
reporting requirements. Paragraph (b) would require recusal from any 
board action on, discussion of, or any other official action on or 
discussion of, those matters. For example, if a director or employee 
were to purchase farm equipment such as a combine harvester from a 
known borrower, the purchase should be reported and reviewed by the 
Standards of Conduct Official for conflicts. If the borrower has a 
matter or transaction pending at the institution, the director or 
employee would be recused from that matter. Note that if the purchase 
were financed it would be a lending transaction covered by Sec. Sec.  
612.2145 and 612.2155. Working together with other provisions of the 
rule, this section is intended to bolster the directors', employees', 
and agents' loyalty to the System institution and to reinforce personal 
responsibility and accountability in avoiding conflicts and acting 
ethically.
    The requirements of disclosure and recusal in this section apply 
not only to directors, employees, and agents, but also those 
consultants, professionals or experts who are hired to give advice on a 
matter, transaction or activity but may not necessarily meet our 
definition of ``agent''. If the consultant, professional or expert has 
an interest that may compromise his or her complete impartiality in a 
matter, transaction or activity for which his or her expertise is 
sought, paragraph (a) requires that he or she disclose that interest 
and paragraph (b) requires that he or she refrain from further 
discussion of System business with respect to that matter, transaction 
or activity.
    System institutions must develop policies and procedures to 
implement this section. Such policies and procedures could include 
procedures for waiver of the recusal requirement if the Standards of 
Conduct Official determines in writing that the conflict would not 
interfere with the person's ability to perform impartially and in the 
best interest of the System institution. In the absence of such waiver 
procedures, recusal is required.

D. Director Reporting [Current Sec.  612.2145 Is Proposed Sec.  
612.2140]

    We would revise Sec.  612.2140(b)(1) to require that each director 
report all ``material'' financial interests with other directors, 
employees, agents or borrowers of the employing, supervised, and 
supervising institution. We believe this section is necessary to help 
directors and Standards of Conduct Officials identify and avoid 
potential conflicts of interests. Because the proposed rule would 
require directors to report only material financial interests we 
believe the requirement will not be unduly burdensome or intrusive.
    As discussed in the section-by-section analysis above, each System 
institution must develop policies and procedures that provide 
parameters for that which constitutes a ``material'' financial 
interest, and may develop policies and procedures that set forth a 
certain de minimis value that would not be considered material for 
reporting requirements. Reporting of material financial interests is 
intended to assist the Standards of Conduct Official in

[[Page 9651]]

identifying and resolving conflict situations and to help a director 
identify areas of prohibited conduct. A material financial interest 
does not necessarily mean that a conflict of interest exists or that 
the interest would unduly influence the director in his or her 
position.
    Like the current rule, the proposed rule would require directors to 
report the name of any relative or person residing in the director's 
household, any business partner, or any entity controlled by the 
director or such persons (alone or in concert) if the director knows or 
has reason to know that such individual or entity transacts business 
with the institution or any institution supervised by the director's 
institution. This rule does not require a director to solicit 
information from these persons or entities to determine whether they 
had or have transactions with the institution. However, the FCA 
presumes that a director would know or have reason to know whether or 
not a relative or other persons residing in the director's household 
had or has transactions with the institution.

E. Directors--Prohibited Conduct [Current Sec.  612.2140 Is Proposed 
Sec.  612.2145]

    In our current rule, director prohibited conduct and the related 
limited exceptions are included in the same discussion. In proposed 
Sec.  612.2145(a), we set forth the basic rules for prohibited conduct. 
In proposed Sec.  612.2145(b), we set forth the specific limitations 
and exceptions to the prohibitions. We believe this change is necessary 
to remove any possible ambiguity from the meaning of the prohibitions. 
Most of these changes are straightforward, but proposed Sec.  
612.2145(a)(6) and (b)(3) regarding acquired property and proposed 
Sec.  612.2145(a)(7) and (b)(4) regarding lending transactions require 
special discussion.
    The proposed rule would clarify the circumstances under which 
directors may and may not purchase property that a System institution 
has owned or acquired by foreclosure or similar action. These proposed 
changes are not substantive; they are clarifications of the rule. 
Proposed Sec.  612.2145(a)(6) would provide that, among other things, a 
director may not knowingly acquire, directly or indirectly, property 
that was owned or acquired by the employing, supervising or supervised 
institution as a result of foreclosure or similar action. Proposed 
Sec.  612.2145(b)(3) would set forth an exception to the acquired 
property prohibition in proposed Sec.  612.2145(a)(6). The exception 
would apply only if the director did not participate in the 
deliberations or decision to foreclose, or to take similar action, or 
to dispose of the property or in establishing the terms of the sale, 
and (1) the director acquired the property through inheritance, or (2) 
the System institution did not own the property or an interest in the 
property at any time during the 12-month period before the director's 
acquisition of the property, or (3) the director acquired the property 
through public auction with open competitive bidding and the Standards 
of Conduct Official determined, before the director acquired the 
property, that the director does not have an advantage over other 
bidders as a result of the director's position and that no other 
conflict of interest or the appearance thereof exists.
    By open competitive bidding, we mean bidding that is both 
competitive, allowing involvement of all interested parties, and that 
is open and unsealed. Open competitive bidding affords all interested 
parties an opportunity to counter-bid. The advantage to open bidding is 
that it discourages unethical behavior or favoritism. A public auction 
can be accomplished on-line as long as there is an opportunity for all 
who may be interested to bid.
    The proposed language does not reflect a substantive change from 
the intent of this original regulatory provision regarding acquired 
property. However, we believe that because of the scope of 
misunderstanding and misapplication of the original provision, the 
revision is necessary.
    Proposed Sec.  612.2145(a)(7) would provide that a director must 
not directly or indirectly borrow from, lend to, or become financially 
obligated with or on behalf of a director, employee, or agent of the 
employing, supervising or supervised institution or a borrower or loan 
applicant of the employing institution. This section addresses lending 
and borrowing relationships. It prohibits a director from entering into 
a lending or borrowing transaction with those who may have a financial 
relationship with the System institution. Lending and borrowing 
relationships include providing guarantees or stand-by letters of 
credit and similar forms of financial obligation.
    The FCA recognizes that there are many situations in which a 
director may enter into lending transactions or business relationships 
that involve financing with other directors, employees, agents, 
borrowers or loan applicants in the ordinary course of business. 
Therefore, to keep the provision from being unduly restrictive, 
proposed Sec.  612.2145(b)(4) would set forth an exception to the 
proposed Sec.  612.2145(a)(7) prohibition. The exception would apply 
if: (1) The transaction is with a relative or any person residing in 
the director's household; or (2) the transaction is undertaken in an 
official capacity in connection with the institution's discounting, 
lending or participation relationships with OFIs and other lenders; or 
(3) the Standards of Conduct Official determines, as authorized under 
board policy and in the manner outlined in the rule, that the potential 
for a conflict of interest is insignificant. The Standards of Conduct 
Official's determination must be in writing; document that the 
transaction is in the ordinary course of business or is not material in 
value or amount; document that the director did not participate in the 
determination of any matter affecting the financial interests of the 
other party to the transaction except those matters affecting all 
shareholders/borrowers in a nondiscriminatory way; and most 
importantly, the Standards of Conduct Official's determination be made 
before the director enters into the transaction. The Standards of 
Conduct Official must renew this determination annually, as applicable. 
For example, if a director and a borrower contemplate an ongoing 
business relationship by which the director purchases grain from a 
borrower on credit on a regular basis, the Standards of Conduct 
Official would have to review this relationship for conflicts. Once 
reviewed, to the extent this is an ongoing relationship in the ordinary 
course of business, the Standards of Conduct Official would not have to 
review each and every transaction, but would renew on an annual basis 
his or her determination that the ongoing relationship remains in the 
ordinary course of business and does not create a conflict.
    The Standards of Conduct Official cannot ratify prohibited conduct 
after the fact. If the transaction has been entered into without a pre-
existing Standards of Conduct Official determination, then the FCA 
could consider the director to have violated this provision of the 
regulation.
    As discussed, each System institution must set specific parameters 
on what constitutes a material financial interest or transaction and 
also what is in the ordinary course of business in the local 
environment. Whether or not to establish a de minimis threshold for 
review would be left to the discretion of each System institution 
board; however, as discussed above, if the institution does establish a 
de minimis value, it must do so under policies and procedures subject 
to FCA examination. The institution's board must not

[[Page 9652]]

establish the de minimis value to be so high or so ambiguous as to 
circumvent the intent of this rule.

F. Employee Reporting [Current Sec.  612.2155 Is Proposed Sec.  
612.2150]

    This provision would require employees to report all ``material'' 
financial interests with directors, employees, agents or borrowers of 
the employing, supervised, and supervising institution. This change can 
be found in proposed Sec.  612.2150(b)(1) and is parallel to the change 
for directors in proposed Sec.  612.2140(b)(1).

G. Employees--Prohibited Conduct [Current Sec.  612.2150 Is Proposed 
Sec.  612.2155]

    This provision has been changed from the current Sec.  612.2150 and 
the revisions are parallel to the changes for director prohibited 
conduct, where applicable.

H. Joint Employees [Proposed Sec.  612.2157]

    This section, like the current rule, prohibits an officer of a Farm 
Credit Bank (FCB) or agricultural credit bank (ACB) from 
contemporaneously working as an employee at an association in its 
district. Also, this provision prohibits a non-officer employee of a 
FCB or ACB from serving as an officer of an association in its 
district. The FCA recognizes that occasionally the System may benefit 
from having a FCB or an ACB officer serve at an association. Therefore, 
this provision is modified from the original to allow joint employee 
relationships with the written approval of the Standards of Conduct 
Official if the bank board of directors agrees that the interests of 
both System institutions outweighs the potential for conflicts of 
interest or conflicts related to devotion of time to official duties. 
The bank must provide written notice to the FCA before the joint 
relationship begins, and the FCA may object within 10 calendar days of 
receiving the bank's notice.

I. Institution Responsibilities [Proposed Sec.  612.2160]

    The proposed rule would update this section to require new 
responsibilities and accountability of System institutions in 
overseeing the standards of conduct program.
    Proposed Sec.  612.2160(a)(1) would require the institution to 
dedicate appropriate resources to support the standards of conduct 
program. The Standards of Conduct Official has many duties and 
responsibilities, and depending on the size of the institution it may 
not be possible for one person to satisfactorily manage all of these 
responsibilities. Each System institution should dedicate personnel and 
resources as necessary to ensure that the standards of conduct program 
is carried out thoroughly and in compliance with this rule.
    Proposed Sec.  612.2160(a)(3) would require the institution to 
notify the FCA immediately of any known or suspected material standards 
of conduct violations. This notification can come directly from the 
board of directors, or from the Standards of Conduct Official as 
separately required in proposed Sec.  612.2170(b)(7). The requirement 
is added here to make clear that the institution itself is accountable 
for notifying the FCA of known or suspected standards of conduct 
violations.
    Proposed Sec.  612.2160(e) would require the institution to ensure 
that directors and employees certify annually that they will adhere to 
the institution's standards of conduct policy and Code of Ethics. 
System institutions would be required under Sec.  612.2160(f) to have 
documentation that agents (1) are subject to applicable industry or 
professional ethics standards, or (2) have certified to adhere to the 
provisions of the System institution's Code of Ethics applicable to 
agents. The certifications could be performed in various ways including 
electronic signatures.
    Proposed Sec.  612.2160(g) would require that System institutions 
make compliance with the standards of conduct program a component of 
the risk assessment process subject to periodic audit, as established 
by the audit committee, by a person or entity independent of the 
standards of conduct program. We would expect an institution to audit 
the standards of conduct program at least once every 3 to 4 years 
consistent with its risk assessment and audit planning process. The 
scope and depth of the audit would be determined and documented by the 
institution.
    Proposed Sec.  612.2160(h) would require institutions to establish 
an effective method of internal controls over the reporting, 
disclosing, and other requirements of this part, including controls for 
the confidentiality of information reported to and maintained by the 
Standards of Conduct Official. It would require institutions to 
establish an effective method of internal controls over the audit of 
the standards of conduct program.

J. Code of Ethics, Policies and Procedures [Proposed Sec.  612.2165]

    Many of the provisions in proposed Sec.  612.2165 would be the same 
as the provisions in current Sec.  612.2165. However, each institution 
should have a strong sense of its role in the System's mission and 
should have a culture of corporate and personal responsibility to 
further that mission. Therefore, in addition to adopting internal 
standards of conduct policies and procedures, proposed Sec.  
612.2165(a) would require each System institution to adopt a Code of 
Ethics that applies to directors and employees and that includes a 
provision for the ethical conduct of agents. Each institution would be 
required to provide a copy of its Code of Ethics to directors, 
employees, and agents. Directors and employees would be required to 
sign the institution's Code of Ethics. Agents not subject to industry 
or professional ethics standards would be required to certify that they 
will adhere to the institution's Code of Ethics provision applicable to 
agents.
    The proposed rule sets forth minimum specific guidelines that each 
System institution's Code of Ethics would be required to meet. The 
institution's Code of Ethics must promote honest and ethical conduct 
including the ethical handling of actual or apparent conflicts of 
interest; promote integrity and compliance with laws and regulations; 
prohibit dishonesty, fraud or deceit and discourage any conduct or act 
that would adversely reflect on the reputation, integrity or competency 
of the System; prohibit misuse of office and provide for the prompt 
reporting of any person or persons who violates the institution's Code 
of Ethics or engages in any activity that may require further 
investigation under Sec.  612.2301, subpart B of the part, to the 
Standards of Conduct Official.
    Proposed Sec.  612.2165(a)(3) would require each institution's 
board to adopt policies and procedures concerning the use of 
unincorporated business entities (UBEs) that, at a minimum, ensure that 
all transactions between the UBE and System institution directors, 
employees, and agents are conducted at arm's length. These policies and 
procedures must ensure that System institution directors, employees, 
and agents comply with their employing institution standards of conduct 
policies and procedures and this rule in their interactions with the 
UBE. For example, System institution directors, employees, and agents 
cannot purchase acquired property from a UBE except in compliance with 
this rule and their institution's standards of conduct policies and 
procedures.
    The FCA believes that each System institution must review and 
update its standards of conduct policies and

[[Page 9653]]

procedures, as necessary, to strengthen them. The FCA expects each 
System institution to modernize and augment its existing standards of 
conduct policies and procedures to ensure the highest standards of 
honesty, ethics, integrity, impartiality and conduct. In doing this, 
each System institution should establish reasonable criteria for 
business relationships and transactions relevant to its business, 
geographic location, and customer base. The standards outlined in this 
rule serve as a minimum bar against which each System institution 
should build and develop stronger internal standards of conduct 
policies and procedures.
    Proposed Sec.  612.2165(b)(2) would require System institutions to 
outline authorities and responsibilities of the Standards of Conduct 
Official. Included in this requirement would be the authority and 
responsibility to review for compliance with this subpart all loans 
considered for approval by the supervisory bank under Sec. Sec.  
614.4460 and 614.4470, respectively. System institution loans to 
directors and employees and loans to FCA employees and others subject 
to Sec. Sec.  614.4460 and 614.4470 present unique conflict of interest 
issues. The System institutions should ensure that credit decisions 
with respect to these loans are made without favoritism or special 
terms. These loans, which include insider loans, warrant a higher level 
of scrutiny for possible conflict or undue influence than non-insider 
loans.
    Proposed Sec.  612.2165(b)(14) would clarify the circumstances 
under which an institution's policies and procedures must prohibit the 
purchase and retirement of the institution's preferred stock. This 
section does not place a restriction on the issuance or retirement of 
borrower stock associated with a director or employee loan transaction.
    Proposed Sec.  612.2165(b)(16) would require the board in its 
policies and procedures to provide for annual training on standards of 
conduct. Training presents an opportunity to continually educate 
directors and employees on standards of conduct issues and the 
importance of ethical behavior.
    Proposed Sec.  612.2165(b)(17) would require the institution to 
report to the FCA exceptions authorized by the institution board under 
Sec.  612.2165(c).
    The FCA recognizes that some of the provisions of the rule may 
prohibit activity where no actual or apparent conflict of interest 
exists. Therefore, proposed Sec.  612.2165(c)(1) would allow each 
System institution to adopt policies and procedures by which the System 
institution board of directors may grant a written exception to certain 
standards of conduct rules under this subpart. The FCA proposes that 
rules for which an exception may be granted on a case-by-case basis are 
a reporting requirement, an employee or director prohibition on 
disclosure of information not generally available to the public, an 
employee prohibition on serving as an officer of a non-System entity in 
the district or of a non-System financial institution, a restriction on 
an employee serving jointly at a bank and association as discussed in 
proposed Sec.  612.2157, and the 5-percent threshold for defining a 
controlled entity. For example, under proposed Sec.  612.2165(c)(1) a 
board could allow an exception to the prohibition with respect to an 
individual director's interest in a ``controlled entity'' where that 
director indirectly owns more than 5 percent of the equity and the 
Standards of Conduct Official determines based on the facts and 
circumstances that there is no potential for conflict of interest. As 
another example, this provision would allow the board to approve an 
exception to the prohibition on an employee serving as an officer or 
director of a non-System entity that transacts business with the System 
institution in its district (proposed Sec.  612.2155(a)(4)), if the 
Standards of Conduct Official determines that there is no conflict of 
interest.
    The exceptions under proposed Sec.  612.2165(c)(1) would have to be 
approved on a case-by-case basis by the institution's board, based on a 
recommendation of the Standards of Conduct Official. The Standards of 
Conduct Official's recommendation would need to be strongly supported 
by a written determination that the prohibition is not necessary to 
avoid a conflict or appearance of a conflict or to ensure impartiality, 
objectivity and public confidence in the System institution. The 
determination would have to be documented in the institution's files 
and renewed at least annually. The institution board would impose 
appropriate conditions, as the circumstances may dictate. In addition, 
the board would provide for periodic review of the criteria to 
determine whether the board continues to support the Standards of 
Conduct Official's recommendation. The exceptions approved would be 
subject to FCA examination, and to its determination of whether the 
prohibition of the activity is necessary to avoid a conflict or 
appearance of a conflict or to ensure impartiality, objectivity and 
public confidence in the System institution.
    The FCA specifically requests comment on whether the provisions 
proposed are appropriate for board waiver and whether other provisions 
should be considered. There are some transactions so susceptible to 
conflicts that the FCA would not consider permitting a waiver of the 
rule prohibiting them. The rules prohibiting directors, employees, and 
agents from acquiring property could not be waived. The rules 
prohibiting an employee from acting as a real estate agent or broker 
could not be waived, and the rule prohibiting an employee from acting 
as an agent or broker in connection with the sale and placement of 
insurance could not be waived. Finally the requirement to comply with 
the institution's standards of conduct policies and Code of Ethics 
could not be waived. As previously stated, there may be other rules for 
which an institution board may appropriately consider granting a 
waiver, and the FCA specifically requests comment on the waiver 
provisions of this proposal and what those rules may be.
    Proposed paragraph (c)(2) of this section would allow the 
institution board to consider a standing exception to director and 
employee reporting requirements under proposed Sec. Sec.  612.2140 and 
612.2150, respectively. As an example, policies and procedures under 
proposed Sec.  612.2165(c)(2) could allow an exception to the 
requirement that a director report the name and nature of a business or 
any entity on whose board the director sits, if the entity is a 
nonprofit organization such as a Chamber of Commerce, or a place of 
worship, and the Standards of Conduct Official determines that the 
potential for conflict is insignificant with respect to that category 
of entity.
    Proposed paragraph (c)(2) would also permit the board to establish 
policies and procedures that provide for a standing exception to the 
restrictions in proposed Sec. Sec.  612.2145(b)(4) and 612.2155(b)(6) 
on lending transactions, if the potential for conflict is insignificant 
because the transaction is not material, or it is in the ordinary 
course of business. An institution may identify certain lending 
transactions that fall under a certain dollar value and are de minimis 
or immaterial. Those transactions falling below such identified amounts 
would not have to be reported to or reviewed by the Standards of 
Conduct Official. In addition, an institution may identify certain 
types of transactions that are in the ordinary course of business. 
Directors and employees could enter into those ordinary course of 
business transactions without the prior review of the Standards of 
Conduct Official. However, where the ordinary course of

[[Page 9654]]

business transaction exceeds the de minimis or immaterial threshold set 
by the institution, the directors and employees must report such 
transactions, by including them in regular reports to the Standards of 
Conduct Official, and the Standards of Conduct Official must review 
them. Putting the exceptions of proposed Sec.  612.2165(c)(2) together, 
a transaction that is in the ordinary course of business and that also 
is de minimis or falls below the immaterial amount would require 
neither director or employee reporting nor Standards of Conduct 
Official review.
    For example, the System institution may find that certain goods and 
services that are offered to the public in the ordinary course of 
business at a fixed price, such as diesel fuel, or equipment repairs, 
do not raise conflict of interest concerns, even if purchased from a 
System borrower with credit. Institution policies and procedures could 
provide that these transactions would not have to be reported or 
approved unless they reached a certain dollar amount or value 
threshold. By contrast, transactions involving price negotiation, such 
as purchasing a tractor or other heavy farm equipment, could raise 
issues of impartiality or favoritism and should be subject to more 
scrutiny.
    In addition to transactions covered in the institution's policies 
and procedures under proposed Sec.  612.2165(c)(2), proposed Sec. Sec.  
612.2145 and 612.2155 retain the existing flexibility for an 
institution's Standards of Conduct Official to review a transaction 
before it is entered into and make a case-by-case determination that 
there is no conflict. The exceptions in proposed Sec.  612.2165(c)(2) 
are designed to be applied to all directors and employees and as such, 
must be set on a conservative basis. However, a particular lending 
transaction that does not fall within the institutions' Sec.  
612.2165(c)(2) exceptions may still be a transaction that the Standards 
of Conduct Official determines has little potential for conflict when 
applying the rules under Sec. Sec.  612.2145 and 612.2155. Proposed 
Sec.  612.2165(f) reminds each System institution that the FCA may 
determine that a transaction or activity constitutes a conflict of 
interest notwithstanding the System institution's board of director 
finding to the contrary. Section 612.2165(d) and (e) are included to 
prevent misuse of the requirements under this section to evade conflict 
of interest rules and situations. Finally, institution policies and 
procedures should provide for periodic review by the System institution 
board.

K. Standards of Conduct Official [Proposed Sec.  612.2170]

    We would revise Sec.  612.2170(a) to require that there must be an 
internal employee who also serves as the institution's Standards of 
Conduct Official and who would be accountable to the institution's 
board for all standards of conduct matters. The FCA believes that an 
in-house Standards of Conduct Official is in the best position to 
advise the board because they are in-tune with the day-to-day 
operations of the institution. In addition, in order to foster a 
culture of highest integrity and ethical conduct, it is important to 
have a Standards of Conduct Official who has a constant presence at, 
relationship with, and respect of, the employees of the institution. 
The proposed rule would require the institution's board of directors to 
provide for other employees to assist the Standards of Conduct Official 
as needed to ensure the effective operations of the institution's 
standards of conduct program.
    Proposed Sec.  612.2170(b) would enhance and clarify the 
responsibility and accountability of the Standards of Conduct Official. 
The Standards of Conduct Official must receive, actively review, and 
maintain the reports required by the rule. Proposed Sec.  
612.2170(b)(6) would require the Standards of Conduct Official to 
report to the board no less than annually on the effectiveness of the 
institution's standards of conduct policy and its implementation. This 
report should include an evaluation of the extent to which safeguards 
are in place to avoid conflicts of interest and standards of conduct 
policy violations and should present the opportunity to make 
improvements to the standards of conduct program.
    The Standards of Conduct Official must also present any violations 
of the standards of conduct policy to the board for appropriate action. 
Section 612.2170(b)(7) would requires the Standards of Conduct Official 
to report to the institution's board and to the FCA all suspected 
criminal and, in addition, any standards of conduct violations that may 
have an adverse impact on continued public confidence in the System or 
any of its institutions.
    Proposed Sec.  612.2170(c) would provide that a Farm Credit bank 
may provide assistance to an affiliated association's board of 
directors and Standards of Conduct Official in complying with this 
part. Proposed Sec.  612.2170(d) would provide that an institution may 
use an outside counsel or consultant to assist the institution in 
meeting standards of conduct requirements. However, the institution's 
in-house Standards of Conduct Official would be responsible for 
overseeing the outside counsel or consultant.
    Proposed Sec.  612.2170(e) would provide that the Standards of 
Conduct Official must coordinate appropriate training with the 
institution's board on an annual basis.

L. Standards of Conduct for Agents [Current Sec.  612.2260 Is Proposed 
Sec.  612.2180]

    It is important for System institutions to hold their agents to the 
same high ethical standards held by their directors and employees. The 
proposed rule would require that institutions document that agents 
representing System institutions in contacts with third parties or who 
provide professional or consultant services such as legal, accounting, 
and appraisal, are subject to industry or professional ethics standards 
and that the institution provide each agent a copy of the institution's 
standards of conduct policy and Code of Ethics. The proposed rule would 
further require that an agent who is not subject to industry or 
professional ethics standards must certify to the System institution 
that the agent will adhere to the provisions of the institution's Code 
of Ethics applicable to agents. Agents play an important role in System 
institutions and this rule would help achieve high ethical standards at 
every level throughout the System.
    To avoid the appearance of conflicts in the disposition or purchase 
of institution-owned or institution-acquired real or personal property, 
we propose that agents must agree to prohibitions similar to those that 
apply to employees. The proposed rule would prohibit agents from 
acquiring any interest in real or personal property if it was owned or 
acquired by the employing institution or any supervised or supervising 
institution as a result of foreclosure or similar action at any time 
during the agent's employment. The prohibition would apply for as long 
as the property is owned or acquired by the System institution, and for 
12 months after the property is transferred out of the System 
institution or after the agency relationship is terminated, whichever 
occurs first.

M. Purchase of System Obligations [Current Sec.  612.2270 Is Proposed 
Sec.  612.2190]

    We revised this section to clarify that directors and employees may 
not purchase any obligation of a System institution except as 
specifically stated.

[[Page 9655]]

III. Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act (5 
U.S.C. 601 et seq.), the FCA hereby certifies that the proposed rule 
would not have a significant economic impact on a substantial number of 
small entities. Each of the banks in the Farm Credit 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, Farm Credit System institutions are not ``small entities'' 
as defined in the Regulatory Flexibility Act.

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 proposed to be amended 
as follows:

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

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

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

0
2. Subpart A, consisting of Sec. Sec.  612.2130 through 612.2270, is 
revised to read as follows:
Subpart A--Standards of Conduct
Sec.
612.2130 Definitions.
612.2135 Responsibilities and conduct.
612.2136 Conflicts of interest.
612.2140 Director reporting.
612.2145 Directors--prohibited conduct.
612.2150 Employee reporting.
612.2155 Employees--prohibited conduct.
612.2157 Joint employees.
612.2160 Institution responsibilities.
612.2165 Code of ethics, policies, and procedures.
612.2170 Standards of Conduct Official.
612.2180 Standards of Conduct for agents.
612.2190 Purchase of System obligations.
612.2260 [Reserved]
612.2270 [Reserved]

Subpart A--Standards of Conduct


Sec.  612.2130  Definitions.

    For purposes of this part, the following terms are defined:
    Agent means 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.
    Code of Ethics means a written set of standards, rules, values, and 
guidance that is used to ensure the ethical conduct of those who sign 
it, and that reflects professionalism and discourages misconduct so 
that the best interests of the institution are advanced.
    Conflicts of interest or the appearance thereof exists when a 
person has a financial interest in a transaction, relationship, or 
activity that actually affects or has the appearance of affecting the 
person's ability to perform official duties and responsibilities in a 
totally impartial manner and in the best interest of the employing 
institution when viewed from the perspective of a reasonable person 
with knowledge of the relevant facts.
    Controlled entity and entity controlled by, for the purposes of 
this rule only, means an interest in an entity in which the individual, 
directly or indirectly, or acting through or in concert with one or 
more persons:
    (1) Owns 5 percent or more of the equity;
    (2) Owns, controls, or has the power to vote 5 percent or more of 
any class of voting securities; or
    (3) Has the power to exercise a controlling influence over the 
management of policies of such entity.
    Employee means any salaried officer or part-time, full-time, 
temporary salaried employee or any non-salaried employee who receives a 
wage.
    Entity means a corporation, company, association, firm, joint 
venture, partnership (general or limited), unincorporated business 
entity, society, joint stock company, trust (business or otherwise), 
fund or other organization or institution.
    Family means an individual and spouse and anyone having the 
following relationship to either: parent, spouse, son, daughter, 
sibling, stepparent, stepson, stepdaughter, stepbrother, stepsister, 
half-brother, half-sister, uncle, aunt, nephew, niece, grandparent, 
grandson, granddaughter, and the spouses of the foregoing and anyone 
whose association or relationship with the director or employee is the 
equivalent of the foregoing.
    Financial interest means an interest in an activity, transaction, 
property, or relationship with a person or an entity that involves 
receiving or providing something of monetary value or other present or 
deferred compensation.
    Financially obligated with means having a joint legally enforceable 
obligation with, being financially obligated on behalf of (contingently 
or otherwise), having an enforceable legal obligation secured by 
property owned by another, or owning property that secures an 
enforceable legal obligation of another.
    Material, when applied to a financial interest or transaction or 
series of transactions, means that the interest or transaction or 
series of transactions is of such magnitude that a reasonable person 
with knowledge of the relevant facts would question the ability of the 
person who has the interest or is party to such transaction(s) to 
perform 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.
    OFI means other financing institutions that have established an 
access relationship with a Farm Credit bank or an agricultural credit 
bank under section 1.7(b)(1)(B) of the Act.
    Officer means the chief executive officer, president, chief 
operating officer, vice president, corporate secretary, treasurer, 
general counsel, chief financial officer, and chief credit officer of 
each System institution, and any person not so designated who holds a 
similar position of authority.
    Ordinary course of business, when applied to a transaction, means:
    (1) A transaction that is usual and customary between or among 
persons who are in business together; or
    (2) A transaction with a person who is in the business of offering 
the goods or services that are the subject of the transaction on terms 
that are not preferential. Preferential means that the transaction is 
not on the same terms as those prevailing at the same time for 
comparable transactions for other persons who are not directors, 
employees, or agents of a System institution.
    Person means individual or entity.
    Relative means any member of the family as defined in this section.
    Service corporation means each service corporation chartered under 
the Act.
    Signed, has the same meaning as set forth in Sec.  620.1 of this 
chapter.
    Standards of Conduct Official means the official designated under 
Sec.  612.2170.
    Supervised institution is a term which only applies within the 
context of a System bank or an employee of a System bank and refers to 
each association supervised by that bank.
    Supervising institution is a term that only applies within the 
context of an association or an employee of an association and refers 
to the bank that supervises that association.

[[Page 9656]]

    System institution and institution mean any bank, association, or 
service corporation, chartered under the Act in the Farm Credit System, 
including the Farm Credit Banks, banks for cooperatives, agricultural 
credit banks, Federal land bank associations, agricultural credit 
associations, Federal land credit associations, production credit 
associations, and the Federal Farm Credit Banks Funding Corporation.
    Unincorporated business entities (UBE) has the same meaning as set 
forth in Sec.  611.1151 of this chapter.


Sec.  612.2135  Responsibilities and conduct.

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


Sec.  612.2136  Conflicts of interest.

    (a) Each director, employee, and agent of a System institution, and 
consultants who provide expert or professional services to the System 
institution, must:
    (1) Take measures to avoid conflicts of interest;
    (2) Disclose conflicts of interest in any matters, activities or 
transactions pending at the System institution, or in the case of 
consultants, experts or professionals, disclose conflicts of interest 
in the matter, activity, or transaction for which they are providing 
services, including financial or other personal or official interests 
that may present a conflict of interest or the appearance thereof, to 
the Standards of Conduct Official; and
    (b) If a person subject to paragraph (a) of this section has a 
conflict of interest in a matter, transaction or activity subject to 
official action, or before the board of directors, then the person 
must:
    (1) Disclose to the official or the board all material non-
privileged information relevant to the consideration of the matter, 
activity or transaction, including:
    (i) The existence, nature, and extent of the person's interests; 
and
    (ii) The facts known to the person as to the matter, activity or 
transaction under consideration;
    (2) Refrain from participating in the official action or board 
discussion of the matter, activity or transaction; and
    (3) Not vote on the matter or transaction.
    (c) The System institution must establish policies and procedures 
to enforce this section which may include procedures by which the 
Standards of Conduct Official may waive the recusal requirement upon 
his or her written determination that a conflict of interest does not 
exist or would not interfere with the person's ability to perform 
impartially and in the best interest of the System institution.


Sec.  612.2140  Director reporting.

    (a) Annually, as of the institution's fiscal year end, and at such 
other times as may be required to comply with paragraph (c) of this 
section, each director must file a written and signed statement with 
the Standards of Conduct Official that fully reports:
    (1) The names of any immediate family members as defined in Sec.  
620.1(e) of this chapter, or affiliated organizations, as defined in 
Sec.  620.1(a) of this chapter, who had transactions with the 
institution at any time during the year;
    (2) Any matter required to be disclosed by Sec.  620.6(f) of this 
chapter; and
    (3) Any additional information the institution may require to make 
the disclosures required by part 620 of this chapter.
    (b) Each director must, at such intervals as the institution's 
board determines is necessary to effectively enforce this regulation 
and the institution's standards of conduct policy and Code of Ethics 
adopted pursuant to Sec.  612.2165, file a written and signed statement 
with the Standards of Conduct Official that contains those disclosures 
required by the regulations and such policy. At a minimum, these 
disclosures must include:
    (1) All material financial interests with directors, employees, 
agents or borrowers of the employing, supervised, and supervising 
institution;
    (2) The name of any relative or any person residing in the 
director's household, any business partner, or any entity controlled by 
the director or such persons (alone or in concert) if the director 
knows or has reason to know that such individual or entity transacts 
business with the institution or any institution supervised by the 
director's institution; and
    (3) The name and the nature of the business of any entity in which 
the director has a material financial interest or on whose board the 
director sits if the director knows or has reason to know that such 
entity transacts business with:
    (i) The director's institution or any institution supervised by the 
director's institution; or
    (ii) A borrower of the director's institution or any institution 
supervised by the director's institution.
    (c) Any director who becomes or plans to become involved in any 
relationship, transaction, or activity that may violate the 
institutions' Code of Ethics or is required to be reported under this 
section or could constitute a conflict of interest, must promptly 
report in writing such involvement or plan to become involved to the 
Standards of Conduct Official for a determination of whether the 
relationship, transaction, or activity is, in fact, a conflict of 
interest.
    (d) Unless a disclosure as a director candidate under part 620 of 
this chapter has been made within the preceding 180 calendar days, a 
newly elected or appointed director must report matters required to be 
reported in paragraphs (a), (b), and (c) of this section to the 
Standards of Conduct Official within 30 calendar days after the 
election or appointment and thereafter must comply with the 
requirements of this section.


Sec.  612.2145  Directors--prohibited conduct.

    (a) Prohibited conduct. Except as specifically provided under 
paragraph (b) of this section, a director of a System institution must 
not:
    (1) Participate, directly or indirectly, in deliberations on, or 
the determination of, any matter affecting, directly or indirectly, the 
financial interest of the director, any relative of the director, any 
person residing in the director's household, any business partner of 
the director, or any entity controlled by the director or such persons 
(alone or in concert);
    (2) Divulge or make use of any fact, information, or document not 
generally available to the public that is acquired by virtue of serving 
on the board of a System institution;
    (3) Use the director's position to obtain or attempt to obtain 
special advantage or favoritism for the director, any relative of the 
director, any person residing in the director's household, any business 
partner of the director, any entity controlled by the director or such 
persons (alone or in concert), any other System institution, or any 
person

[[Page 9657]]

transacting business with the institution, including borrowers and loan 
applicants;
    (4) Use the director's position or information acquired in 
connection with the director's position to solicit or obtain, directly 
or indirectly, any gift, fee, or other present or deferred compensation 
or for any other personal benefit on behalf of the director, any 
relative of the director, any person residing in the director's 
household, any business partner of the director, any entity controlled 
by the director or such persons (alone or in concert), any other System 
institution, or any person transacting business with the institution, 
including borrowers and loan applicants;
    (5) Accept or solicit, directly or indirectly, any gift, fee, or 
other present or deferred compensation that is offered or could 
reasonably be viewed as being offered to influence official action or 
to obtain information that the director has access to by reason of 
serving on the board of a System institution;
    (6) Knowingly acquire, directly or indirectly, any interest in any 
real or personal property, including mineral interests, that was owned 
or acquired by the employing, supervising, or any supervised 
institution as a result of foreclosure or similar action;
    (7) Directly or indirectly borrow from, lend to, or become 
financially obligated with or on behalf of, a director, employee, or 
agent of the employing, supervising or supervised institution or a 
borrower, or loan applicant of the employing institution; or
    (8) Violate an institution's policies and procedures governing 
standards of conduct or Code of Ethics.
    (b) Exceptions to prohibited conduct. (1) A director may 
participate in deliberations and determinations of matters prohibited 
under paragraph (a)(1) of this section only if the matter is one of 
general applicability affecting all shareholders/borrowers in a 
nondiscriminatory way, as determined by the Standards of Conduct 
Official.
    (2) A director may divulge or make use of any fact, information, or 
document prohibited under paragraph (a)(2) of this section, only if in 
the performance of the director's official duties.
    (3) A director may acquire an interest in any real or personal 
property prohibited under paragraph (a)(6) of this section only if the 
director did not participate in the deliberations or decision to 
foreclose, or take similar action, or to dispose of the property or in 
establishing the terms of the sale; and
    (i) The director acquired the property through inheritance; or
    (ii) The System institution did not own the property or interest at 
any time during the 12-month period before the director's acquisition 
of the property; or
    (iii) The director acquired the property through public auction 
with open competitive bidding and the Standards of Conduct Official 
determined in writing, before the director acquired the property, that 
the director does not have an advantage over other bidders as a result 
of the director's position and that no other conflict of interest or 
appearance thereof exists.
    (4) A director may enter into a lending transaction prohibited 
under paragraph (a)(7) of this section only if:
    (i) The transaction is with a relative or any person residing in 
the director's household;
    (ii) The transaction is undertaken in an official capacity in 
connection with the institution's discounting, lending or participation 
relationships with OFIs and other lenders; or
    (iii) The Standards of Conduct Official, on a case-by-case basis, 
determines and documents, pursuant to a board adopted policy and in the 
manner outlined herein, that the potential for conflict is 
insignificant. The Standards of Conduct Official's determination must:
    (A) Be in writing;
    (B) Adequately demonstrate that the transaction is in the ordinary 
course of business or is not material in amount or value;
    (C) Adequately demonstrate that the director did not participate in 
the determination of any matter affecting the financial interests of 
the other party to the transaction except those matters affecting all 
shareholders/borrowers in a nondiscriminatory way;
    (D) Be made before the director enters into the transaction, or at 
the time the director is appointed or elected; and
    (E) Be renewed annually, as applicable.


Sec.  612.2150  Employee reporting.

    (a) Annually, as of the institution's fiscal yearend, and at such 
other times as may be required to comply with paragraph (c) of this 
section, each senior officer as defined in Sec.  619.9310 of this 
chapter must file a written and signed statement with the Standards of 
Conduct Official that fully reports:
    (1) The names of any immediate family members, as defined in Sec.  
620.1(e) of this chapter, or affiliated organizations, as defined in 
Sec.  620.1(a) of this chapter, who had transactions with the 
institution at any time during the year;
    (2) Any matter required to be disclosed by Sec.  620.6(f) of this 
chapter; and
    (3) Any additional information the institution may require to make 
the disclosures required by part 620 of this chapter.
    (b) Each employee must, at such intervals as the institution's 
board determines is necessary to effectively enforce this regulation 
and the institution's standards of conduct policy and Code of Ethics 
adopted pursuant to Sec.  612.2165, file a written and signed statement 
with the Standards of Conduct Official that contains those disclosures 
required by the regulation and such policy. At a minimum, these 
disclosures must include:
    (1) All material financial interests with directors, employees, 
agents or borrowers of the employing, supervised, and supervising 
institutions;
    (2) The name of any relative or any person residing in the 
employee's household, any business partner, or any entity controlled by 
the employee or such persons (alone or in concert) if the employee 
knows or has reason to know that such individual or entity transacts 
business with the employing institution, or any institution supervised 
by the employing institution; and
    (3) The name and the nature of the business of any entity in which 
the employee has a material financial interest or on whose board the 
employee sits if the employee knows or has reason to know that such 
entity transacts business with:
    (i) The employing institution or any institution supervised by the 
employing institution; or
    (ii) A borrower of the employing institution or any institution 
supervised by the employing institution.
    (c) Any employee who becomes or plans to become involved in any 
relationship, transaction, or activity that is required to be reported 
under this section or could constitute a conflict of interest must 
promptly report in writing such involvement to the Standards of Conduct 
Official for a determination of whether the relationship, transaction, 
or activity is, in fact, a conflict of interest.
    (d) A newly hired employee must report matters required to be 
reported in paragraphs (a), (b), and (c) of this section to the 
Standards of Conduct Official five (5) business days after starting 
employment and thereafter must comply with the requirements of this 
part.


Sec.  612.2155  Employees--prohibited conduct.

    (a) Prohibited conduct. Except as specifically provided under 
paragraph

[[Page 9658]]

(b) of this section, an employee of a System institution must not:
    (1) Participate, directly or indirectly, in deliberations on, or 
the determination of, any matter affecting, directly or indirectly, the 
financial interest of the employee, any relative of the employee, any 
person residing in the employee's household, any business partner of 
the employee, or any entity controlled by the employee or such persons 
(alone or in concert);
    (2) Divulge or make use of any fact, information, or document not 
generally available to the public that is acquired by virtue of being 
an employee of a System institution;
    (3) Use the employee's position to obtain or attempt to obtain 
special advantage or favoritism for the employee, any relative of the 
employee, any person residing in the employee's household, any business 
partner of the employee, any entity controlled by the employee or such 
persons (alone or in concert), any other System institution, or any 
person transacting business with the institution, including borrowers 
and loan applicants;
    (4) Serve as an officer or director of an entity other than a 
System institution that transacts business with a System institution in 
the district or of any commercial bank, savings and loan, or other non-
System financial institution. For the purposes of this paragraph, 
``transacts business'' does not include loans by a System institution 
to a family-owned entity, service on the board of directors of the 
Federal Agricultural Mortgage Corporation, or transactions with 
nonprofit entities or entities in which the System institution has an 
ownership interest;
    (5) Use the employee's position or information acquired in 
connection with the employee's position to solicit or obtain, directly 
or indirectly, any gift, fee, or other present or deferred compensation 
or for any other personal benefit on behalf of the employee, any 
relative of the employee, any person residing in the employee's 
household, any business partner of the employee, any entity controlled 
by the employee or such persons (alone or in concert), any other System 
institution, or any person transacting business with the institution, 
including borrowers and loan applicants;
    (6) Accept or solicit, directly or indirectly, any gift, fee, or 
other present or deferred compensation that is offered or could 
reasonably be viewed as being offered to influence official action or 
to obtain information that the employee has access to by reason of 
employment with a System institution;
    (7) Knowingly acquire, directly or indirectly, any interest in any 
real or personal property, including mineral interests, that was owned 
or acquired by the employing, supervising, or any supervised 
institution as a result of foreclosure or similar action;
    (8) Directly or indirectly borrow from, lend to, or become 
financially obligated with or on behalf of, a director, employee, or 
agent of the employing, supervising, or supervised institution or a 
borrower or loan applicant of the employing institution;
    (9) Act as a real estate agent or broker;
    (10) Act as an agent or broker in connection with the sale and 
placement of insurance; or
    (11) Violate an institution's policies and procedures governing 
standards of conduct or Code of Ethics.
    (b) Exceptions to prohibited conduct. (1) An employee may 
participate in deliberations and determinations of matters prohibited 
under paragraph (a)(1) of this section only if the matter is one of 
general applicability affecting all shareholders/borrowers in a 
nondiscriminatory way, as determined by the Standards of Conduct 
Official.
    (2) An employee may divulge or make use of a fact, information, or 
document prohibited under paragraph (a)(2) of this section only if in 
the performance of official duties.
    (3) Notwithstanding the prohibitions in paragraph (a)(4) of this 
section, an employee may serve as an officer or director of an employee 
credit union. With the prior approval of the board of the employing 
institution, an employee of a Farm Credit Bank or association may serve 
as a director of a cooperative that borrows from an agricultural credit 
bank. Prior to approving an employee's request, the board must 
determine whether the employee's proposed service as a director is 
likely to cause the employee to violate any regulations in this part or 
the institution's policies, e.g., the requirements relating to devotion 
of time to official duties.
    (4) An employee may acquire an interest in real or personal 
property prohibited under paragraph (a)(7) of this section only if the 
employee did not participate in the deliberations or decision to 
foreclose on the property or to take action, or to dispose of the 
property or in establishing the terms of the sale; and
    (i) The employee acquired the property through inheritance; or
    (ii) The System institution did not own the property or interest at 
any time during the 12-month period before the employee's acquisition 
of the property.
    (5) An employee may enter into a lending transaction prohibited 
under paragraph (a)(8) of this section only if:
    (i) The transaction is with a relative or any person residing in 
the employee's household;
    (ii) The transaction is undertaken in an official capacity in 
connection with the institution's discounting, lending, or 
participation relationships with OFIs and other lenders; or
    (iii) The Standards of Conduct Official on a case-by-case basis, 
determines and documents, pursuant to a board adopted policy under 
Sec.  612.2165 and in the manner outlined herein, that the potential 
for conflict is insignificant. The Standards of Conduct Official's 
determination must:
    (A) Be in writing;
    (B) Adequately demonstrate that the transaction is in the ordinary 
course of business or is not material in value or amount;
    (C) Adequately demonstrate that the employee did not participate in 
the determination of any matter affecting the financial interests of 
the other party to the transaction except those matters affecting all 
shareholders/borrowers in a nondiscriminatory way;
    (D) Be made before the transaction in question is entered into; and
    (E) Be renewed annually, as applicable.
    (6) Paragraph (a)(9) of this section does not apply to transactions 
involving the purchase or sale of real estate intended for the use of 
the employee, a member of the employee's family, or a person residing 
in the employee's household.
    (7) Paragraph (a)(10) of this section does not apply to the sale or 
placement of insurance authorized by section 4.29 of the Act.


Sec.  612.2157  Joint employees.

    (a) An employee of a Farm Credit bank may serve as an employee of 
an association in its district only if:
    (1) The employee is not an officer of the Farm Credit bank and will 
not serve as an officer of the association; or
    (2) Before such service begins, the Farm Credit bank's Standards of 
Conduct Official consents in writing to such service, the Farm Credit 
bank board of directors agrees that the interest of both System 
institutions outweighs the potential for conflicts of interest or 
conflicts related to devotion of time to official duties, the Farm 
Credit bank delivers written notice to the Farm Credit Administration, 
and the Farm Credit Administration does not object to such service 
within ten (10) calendar days of receiving the notice.

[[Page 9659]]

    (b) Each institution must appropriately reflect the expense of 
joint employees in its financial statements.


Sec.  612.2160  Institution responsibilities.

    Each institution must:
    (a) Ensure compliance with this part by its directors, employees, 
and agents and at a minimum:
    (1) Provide support as necessary to the Standards of Conduct 
program including assigning appropriate resources and staffing to the 
Standards of Conduct Official;
    (2) Act promptly to preserve the integrity of and public confidence 
in the institution in any matter involving a conflict of interest or 
the appearance of a conflict of interest, whether or not specifically 
addressed by this subpart or the policies and procedures adopted 
pursuant to Sec.  612.2165; and
    (3) Notify the Farm Credit Administration immediately of known or 
suspected material standards of conduct violations as described in 
Sec.  612.2170(b)(7).
    (b) Take appropriate measures to ensure that all directors and 
employees are informed of the requirements of this regulation and 
policies and procedures adopted pursuant to Sec.  612.2165.
    (c) Maintain all standards of conduct policies and procedures, 
reports, investigations, determinations, and evidence of compliance 
with this part for a minimum of six (6) years.
    (d) Remain informed of applicable industry approved best practices 
for standards of conduct.
    (e) Ensure that directors and employees annually certify in writing 
that they will adhere to the institution's standards of conduct policy 
and Code of Ethics.
    (f) Provide its agents a copy of the institution's standards of 
conduct policy and Code of Ethics;
    (1) Adequately document which of its agents are subject to industry 
or professional ethics standards; and
    (2) Require each agent that is not subject to industry or 
professional ethics standards to certify that he or she will adhere to 
the provisions of the institution's Code of Ethics applicable to 
agents.
    (g) Ensure that compliance with the standards of conduct program is 
a component of the institution's risk assessment process subject to 
periodic audit by a person or entity independent of the program.
    (h) Develop, implement and maintain an effective method of internal 
controls over the reporting, disclosure and other requirements of this 
part. The method of internal controls, at a minimum, must comply with 
the requirements of applicable Farm Credit Administration regulations, 
including Sec.  618.8430 of this chapter and include controls for:
    (1) The confidentiality of information reported to and maintained 
by the Standards of Conduct Official; and
    (2) The audit of the standards of conduct program for compliance by 
a person or entity independent of the program.


Sec.  612.2165  Code of Ethics, policies, and procedures.

    (a) Each institution's board of directors must adopt:
    (1) Policies and procedures governing standards of conduct for 
directors, employees, and agents; and
    (2) A code of Ethics that applies to directors and employees and 
that includes a provision for the ethical conduct of agents to ensure 
the avoidance of conflicts of interest in the performance of their 
duties. The Code of Ethics must include specific guidelines on what is 
acceptable and unacceptable conduct. The Code of Ethics must be signed 
by directors and employees. Agents must be presented with the 
institution's Code of Ethics, and agents not subject to industry or 
professional ethics standards must sign the institution's Code of 
Ethics provisions applicable to agents. The institution's Code of 
Ethics must:
    (i) Promote honest and ethical conduct, including the ethical 
handling of actual or apparent conflicts of interest;
    (ii) Promote integrity and compliance with applicable laws, rules 
and regulations governing standards of conduct;
    (iii) Inform directors and employees that they will be held 
accountable for adhering to the institution's Code of Ethics, or in the 
case of agents, to industry or professional ethics standards or, in the 
absence thereof, to the System institution's Code of Ethics provisions 
applicable to agents;
    (iv) Prohibit conduct involving dishonesty, fraud, or deceit and 
discourage the commitment of any act that reflects adversely on the 
reputation, integrity, or competency of the System institution or the 
System;
    (v) Prohibit conduct involving misuse of office; and
    (vi) Provide for the prompt reporting to the Standards of Conduct 
Official any person or persons in violation of the institution's Code 
of Ethics and of any activity that may require further investigation 
and reporting under Sec.  612.2301;
    (3) Policies and procedures related to UBEs that ensure the System 
institution's directors, employees, and agents and the UBE members, 
partners, employees and agents comply with their employing 
institution's standards of conduct and avoid conflicts of interest in 
carrying out their duties with respect to the UBE.
    (b) Board policies and procedures adopted pursuant to paragraph (a) 
of this section must reflect due consideration of the potential adverse 
impact of activities permitted under the policies and procedures and 
must at a minimum:
    (1) Establish requirements and prohibitions as are necessary to 
promote public confidence in the institution and the System, preserve 
the integrity and independence of the supervisory process, and prevent 
the improper use of official property, position, or information. In 
developing such requirements and prohibitions, the institution must 
address such issues as the hiring of relatives, political activity, 
devotion of time to duty, use of institution resources, the exchange of 
gifts and favors among directors and employees of the employing, 
supervising, and supervised institution, and the circumstances under 
which gifts may be accepted by directors and employees from outside 
sources, in light of the foregoing objectives;
    (2) Outline authorities and responsibilities of the Standards of 
Conduct Official, including:
    (i) The authority and responsibility to review for compliance with 
this subpart all loans before the supervisory bank's approval under 
Sec. Sec.  614.4460 and 614.4470, respectively; and
    (ii) A process to allow the Standards of Conduct Official to report 
matters to the board without fear of reprisal;
    (3) Establish criteria for business relationships and transactions 
not specifically prohibited by this part between employees or directors 
and borrowers, loan applicants, directors, or employees of the 
employing, supervised, or supervising institutions, or persons 
transacting business with such institutions, including OFIs or other 
lenders having an access or participation relationship;
    (4) Establish criteria under which employees may accept outside 
employment or compensation;
    (5) Establish conditions under which employees may receive loans 
from System institutions;
    (6) Establish conditions under which employees may acquire an 
interest in real or personal property that served as collateral for a 
loan from a System institution;
    (7) Establish conditions under which employees may purchase any 
real or personal property of a System

[[Page 9660]]

institution acquired by such institution for its operations. System 
institutions must use open competitive bidding whenever they sell 
surplus property above a stated value (as established by the board) to 
their employees;
    (8) Provide for a reasonable period of time for directors and 
employees to terminate transactions, relationships, or activities that 
are subject to prohibitions that arise at the time of adoption or 
amendment of the policies;
    (9) Require new directors and new employees involved in 
transactions, relationships, and activities prohibited by these 
regulations or internal policies to terminate such transactions within 
the same time period established for existing directors or employees 
pursuant to paragraph (b)(8) of this section, beginning with the 
commencement of the director's term for new directors, and commencement 
of official duties for new employees, or such shorter time period as 
the institution may establish;
    (10) Establish procedures providing for a director's, employee's, 
or agent's recusal from official action on any matter in which the 
director, employee, or agent is prohibited from participating under 
these regulations or the institution's policies;
    (11) Establish documentation requirements demonstrating compliance 
with standards of conduct decisions and board policy;
    (12) Establish reporting requirements, consistent with this part, 
to enable the institution to comply with Sec.  620.6 of this chapter, 
monitor conflicts of interest, and monitor recusal compliance;
    (13) Establish appeal procedures available to any employee to whom 
any required approval has been denied;
    (14) Prohibit directors and employees from purchasing or retiring 
any preferred stock of the institution in advance of the release of 
material non-public information concerning the institution to other 
stockholders;
    (15) Establish when directors and employees may purchase and retire 
their preferred stock in the institution;
    (16) Require annual training and other appropriate measures to 
ensure that all directors and employees are educated on best practices 
for ethical behavior and standards of conduct and perform their duties 
and responsibilities in an objective and impartial manner; and
    (17) Require that the institution report to the Farm Credit 
Administration exceptions authorized by the board pursuant to paragraph 
(c) of this section.
    (c) Board policies and procedures adopted pursuant to paragraphs 
(a) and (b) of this section may provide for:
    (1) The board to consider a case-by-case exception to conflicts of 
interest requirements (Sec.  612.2136), director and employee reporting 
requirements (Sec. Sec.  612.2140 and 612.2150), the 5-percent 
threshold on controlled entity (Sec.  612.2130), joint employee 
prohibitions (Sec.  612.2157), employee prohibitions on serving as an 
officer or director of a non-System financial institution (Sec.  
612.2155(a)(4)), and director and employee prohibitions on sharing 
information (Sec. Sec.  612.2145(a)(2) and 612.2155(a)(2), 
respectively). An exception may be authorized only upon board approval 
after the board considers the written recommendation of the Standards 
of Conduct Official. The recommendation must be adequately supported by 
the Standards of Conduct Official's written determination that in that 
particular matter or transaction application of the prohibition subject 
to the exception is not necessary to avoid a conflict of interest, to 
avoid the appearance of a conflict of interest or to ensure the 
confidence in the impartiality and objectivity of the director, 
employee, or System institution. The board must provide for periodic 
review of the criteria to determine whether the exception continues to 
be appropriate. If the board approves an exception, it may impose 
appropriate conditions, such as requiring a written disqualification or 
additional public disclosure.
    (2) Exceptions to reporting requirements under Sec. Sec.  612.2140 
and 612.2150 and exceptions to the requirements under Sec. Sec.  
612.2145(b)(4) and 612.2155(b)(6) that the Standards of Conduct 
Official review a lending transaction before it is entered into. Broad 
based exceptions in policies may be authorized only if the potential 
for conflict of interest in that category of interests or transactions 
is insignificant. The potential for conflict of interest may only be 
considered insignificant if:
    (i) The board determines, under its policies and procedures, that 
the type of interest or transaction is so immaterial in amount or value 
that no reasonable person with knowledge of all the facts could 
conclude that the interest or transaction would influence a director's 
or employee's ability to act impartially and in the best interests of 
the System institution. For this exception, transactions otherwise 
prohibited under Sec. Sec.  612.2145 and 612.2155 do not require the 
prior approval of the Standards of Conduct Official or reporting under 
Sec. Sec.  612.2140 and 612.2150; or
    (ii) The board determines, under its policies and procedures that 
the types of interests or transactions covered by the exception or 
reporting requirement are in the ordinary course of business. For this 
exception, transactions otherwise prohibited under Sec. Sec.  612.2145 
and 612.2155 do not require the prior approval of the Standards of 
Conduct Official but must be reported under Sec. Sec.  612.2140 and 
612.2150, and must be reviewed by the Standards of Conduct Official at 
least annually; and
    (iii) The board must consider the written recommendation of the 
Standards of Conduct Official in developing these policy exceptions. 
The recommendation must be adequately supported by the Standards of 
Conduct Official's written determination that the amount of value in 
the transaction or the particular type of interest or transaction, does 
not require application of the reporting requirement or prohibition 
subject to the exception and is not necessary to avoid a conflict of 
interest, to avoid the appearance of a conflict of interest or to 
ensure the confidence in the impartiality and objectivity of the 
director, employee, or System institution.
    (d) An institution's directors and employees, including the 
Standards of Conduct Official, must not engage in any act or practice 
to evade the prohibitions and other requirements of this part.
    (e) The Farm Credit Administration may take appropriate action 
against any institution, director or employee who or that has entered 
into any transaction for the purpose of evading the requirements of 
this part.
    (f) Notwithstanding the exceptions that may be authorized and 
approved under this subpart, the Farm Credit Administration may find 
that a particular financial interest or transaction, relationship, or 
activity constitutes a conflict of interest or the appearance of a 
conflict of interest.


Sec.  612.2170  Standards of Conduct Official.

    (a) Each institution's board of directors must:
    (1) Designate an officer of the institution as its Standards of 
Conduct Official; and
    (2) Authorize other employees of the institution or outside counsel 
or consultants to assist the Standards of Conduct Official as needed, 
and dedicate resources as needed, to ensure the effective operations of 
the institution's standards of conduct program for compliance with 
institution policies and the Farm Credit Administration's standards of 
conduct regulations.
    (b) The Standards of Conduct Official must:
    (1) Advise directors, director candidates, employees, and potential

[[Page 9661]]

new employees concerning the provisions of this part;
    (2) Receive, review, and maintain reports required by this part;
    (3) Make such determinations as are required by this part;
    (4) Maintain records of determinations as are required by this 
part;
    (5) Make appropriate investigations, as directed by the 
institution's board;
    (6) Report to the board no less than annually on the effectiveness 
of the institution's standards of conduct policy and its 
implementation;
    (7) Report promptly to the institution's board and the Office of 
General Counsel, Farm Credit Administration, all cases where:
    (i) A preliminary investigation indicates that a Federal criminal 
statute pursuant to subpart B of this part may have been violated;
    (ii) An investigation results in the resignation or discharge of an 
employee or the resignation or potential removal of a director; or
    (iii) A known or suspected criminal or standards of conduct 
violation by a director, employee or agent may have an adverse impact 
on continued public confidence in the System or any of its 
institutions.
    (8) Investigate or cause to be investigated all cases involving:
    (i) Possible violations of criminal statutes by a director, 
employee or agent;
    (ii) Possible violations of Sec. Sec.  612.2136, 612.2145 and 
612.2155, and applicable policies and procedures approved under Sec.  
612.2165;
    (iii) Complaints received against the directors, employees, and 
agents of such institution; and
    (iv) Possible violations of other provisions of this part or when 
the activities or suspected activities of a director, employee or agent 
are of a sensitive nature and could affect continued public confidence 
in the institution or System.
    (c) A Farm Credit bank may provide assistance to an affiliated 
association's board of directors and Standards of Conduct Official in 
complying with this part.
    (d) A System institution may use an outside counsel or consultant 
to assist in complying with this part. However, the Standards of 
Conduct Official must oversee the outside counsel or consultant and 
remains accountable to the board.
    (e) The Standards of Conduct Official must coordinate with the 
board and management in administering annual training to ensure that 
directors and employees remain informed of the institution's current 
standards of conduct policy and Code of Ethics.


Sec.  612.2180  Standards of conduct for agents.

    (a) 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 its institutions. The avoidance of misconduct and conflicts 
of interest is indispensable to the maintenance of these standards.
    (b) System institutions must utilize safe and sound business 
practices in the engagement, utilization, and retention of agents. 
These practices must provide for the selection of qualified and 
reputable agents. Agents representing a System institution in contacts 
with third parties or who provide consultant or professional services 
such as legal, accounting and appraisal, must review and acknowledge 
receipt of the institution's Code of Ethics. Agents must certify to the 
System institution that the agent will adhere to the agent's 
professional or industry ethics standards, or to the institution's Code 
of Ethics provisions applicable to agents. Employing System 
institutions are responsible for the actions of their agents, and must 
take appropriate investigative and corrective action in the case of a 
breach of fiduciary duties by the agent or failure of the agent to 
carry out its duties.
    (c) System institutions must exercise special diligence and 
control, through good business practices, to avoid or control 
situations that have inherent potential for sensitivity, either real or 
perceived. These areas include the employment of agents who are related 
to directors or employees of System institutions; the solicitation and 
acceptance of gifts, contributions, or special considerations by 
agents; and the use of System and borrower information obtained in the 
course of the agent's association with System institutions.
    (d) An agent may not knowingly acquire, directly or indirectly, 
except through inheritance, any interest in real or personal property, 
including a mineral interest, that was owned by the employing 
institution or any supervised or supervising institution as a result of 
foreclosure or similar action during the agent's employment. This 
prohibition applies for one (1) year after the transfer of the property 
out of the System institution or after the termination of the agent 
relationship, whichever occurs first.


Sec.  612.2190  Purchase of System obligations.

    (a) Employees and directors of System institutions must not 
purchase any obligation of a System institution, including any joint, 
consolidated, or Systemwide obligation, unless such obligation is:
    (1) Part of an offering available to the general public; and
    (2) Purchased through a dealer or dealer bank affiliated with a 
member of the selling group designated by the Federal Farm Credit Banks 
Funding Corporation or purchased in the secondary market.
    (b) A director or employee of the Federal Farm Credit Banks Funding 
Corporation must not purchase or otherwise acquire, directly or 
indirectly, except by inheritance, any obligation of a System 
institution, including any joint, consolidated, or Systemwide 
obligation.


Sec.  612.2260 and 612.2270  [Reserved]

    Dated: February 7, 2014.
Dale L. Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2014-03098 Filed 2-19-14; 8:45 am]
BILLING CODE 6705-01-P