[Federal Register Volume 59, Number 92 (Friday, May 13, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-11496]
[[Page Unknown]]
[Federal Register: May 13, 1994]
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FARM CREDIT ADMINISTRATION
12 CFR Part 612
RIN 3052-AB47
Personnel Administration
AGENCY: Farm Credit Administration.
ACTION: Final rule.
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SUMMARY: The Farm Credit Administration (FCA), by the Farm Credit
Administration Board (Board), adopts final amendments to the
regulations relating to standards of conduct for directors and
employees of Farm Credit System (FCS or System) institutions, excluding
the Federal Agricultural Mortgage Corporation. This action results from
a reassessment of the regulations in light of the amendments to the
Farm Credit Act of 1971 (1971 Act) made by the Agricultural Credit Act
of 1987 (1987 Act) and the findings of a review required by section 514
of the Farm Credit Banks and Associations Safety and Soundness Act of
1992 (1992 Act). The final rule updates the regulations to reflect
statutory changes and the change in focus of the FCA's regulatory
oversight of personnel matters. In addition, the final rule enhances
and clarifies the regulations to ensure that they fulfill the purposes
of section 514 of the 1992 Act relative to the reporting of financial
information and potential conflicts of interest.
EFFECTIVE DATE: The regulations shall become effective upon the
expiration of 30 days after publication during which either or both
houses of Congress are in session or December 31, 1994, whichever is
later. Notice of the effective date will be published in the Federal
Register.
FOR FURTHER INFORMATION CONTACT:
John J. Hays, Policy Analyst, Policy Development and Planning Division,
Office of Examination, Farm Credit Administration, McLean, VA 22102-
5090, (703) 883-4498, TDD (703) 883-4444,
or
Dorothy J. Acosta, Assistant General Counsel, Regulatory Operations
Division, Office of General Counsel, Farm Credit Administration,
McLean, VA 22102-5090, (703) 883-4020, TDD (703) 883-4444.
SUPPLEMENTARY INFORMATION: On August 19, 1993, the FCA proposed
amendments to its regulations relating to standards of conduct for
directors and employees of System institutions. See 58 FR 44139. The
final regulations retain much of the content of the existing and
proposed regulations, but strengthen and clarify them, expanding some
of the provisions and relaxing others.
The final regulations also address the concerns and suggestions
received on the proposed regulations during the comment period, which
expired on September 30, 1993. The FCA received seven comment letters
on the proposed regulations during the comment period. Three letters
were submitted by System banks, three by System associations, and one
by the Farm Credit Council (FCC) on behalf of its member banks and the
Federal Farm Credit Banks Funding Corporation. These comments and the
FCA responses are summarized below.
In addition to comments received during the comment period, three
letters were received concerning the proposed amendments that have also
been considered by the FCA Board. Two comment letters pertaining to the
proposed standards-of-conduct regulations were received pursuant to the
FCA's request for comments on regulatory burden, published in the
Federal Register on June 23, 1993. See 58 FR 34003. These comments
related to reporting requirements and are similar to the comments
received during the comment period for the proposed regulations. They
are summarized and addressed in the Board's response to comments
relating to reporting that were received during the comment period for
the proposed regulations. One letter was received from an association
as a followup to a meeting held in Dallas, Texas, between FCA's Board
and senior management and directors and officers of FCS associations.
The association expressed a concern regarding the ability to attract
and retain qualified directors if they are prohibited from purchasing
acquired property as proposed. The FCA received numerous comments on
this prohibition and the Board's response appears later in the
preamble.
General Comments
Two comments were received concerning the effective date of the
amendments. The FCC urged the FCA to allow sufficient lead time between
publication of the final regulations and the effective date to permit
boards of directors the opportunity to consider carefully the many
policy judgments that are left to their discretion by the regulations.
Another comment recommended an effective date no earlier than January
1, 1995, suggesting that existing regulations and policies would
continue to provide adequate direction and control in the interim.
The Board agrees that there should be sufficient lead time to
revise policies, especially in view of changes made in the final
regulations in response to comments. Although the final regulations are
substantially changed from the proposed regulations in response to the
comments, the Board believes that with the delayed effective date the
public will have ample opportunity to further review the regulations
and bring any observations to the Board's attention prior to the
effective date of the regulations. As always, the Board will consider
requests for further clarification of or amendments to the regulations
prior to or after their effective date. Consequently, the Board adopts
final regulations with a delayed effective date not earlier than
December 31, 1994.
One commenter stated that the proposed regulations would result in
a regulatory burden and that while some improvement in clarity and
flexibility is offered, the benefits do not appear commensurate with
the time and cost of implementing the changes. The commenter also
stated that conflicts of interest have not been improperly or
inadequately handled and that there is no reason to believe the
proposed changes will provide any significant improvement in avoiding,
handling, or reporting conflict-of-interest situations where an
institution has been complying with the present regulations. According
to the commenter, the proposed regulations would require substantial
effort to revamp policies and procedures.
The FCA Board has not undertaken this revision of the standards-of-
conduct regulations because of improper or inadequate handling or
reporting of conflicts of interest. Rather, as noted earlier, the
revision is intended to update the regulations to reflect statutory
changes and a change in the focus of the FCA's regulatory oversight of
personnel matters, as well as to respond to section 514 of the 1992
Act. While the FCA recognizes that the revamping of policies and
procedures requires substantial effort, the final regulations attempt
to minimize any burden by providing a delayed effective date. Also, the
FCA has adjusted the proposed regulations in response to comments where
it was possible to achieve its objectives by less burdensome means. The
final regulations place more responsibility on the institutions and
their officers and directors for identifying possible sources of
conflict and developing adequate controls, but also offer more
flexibility for developing procedures that effectively address
significant conflicts without imposing burdensome requirements that are
ineffective in preventing conflicts of interest. While this will
initially require more work, the FCA believes that it is a more
effective approach to conflicts of interest and that it more
appropriately reflects the focus of the responsibility for preventing
conflicts of interest and the role of the FCA as regulator.
Another commenter supported four of the primary FCA policy
objectives, namely: (1) Enhancing each association's accountability for
sound standards-of-conduct programs; (2) maintaining high standards of
conduct to ensure the proper performance of System business; (3)
holding directors and employees to the same standard where the
potential for conflict is the same; and (4) establishing that the
internal corporate matters of devotion of time to official duties,
political activity, nepotism, exchange of gifts, and improper use of
official property are best left to each institution's board of
directors to oversee through the implementation of a standards-of-
conduct policy. However, the commenter disagreed with the proposed
strict prohibition of a director purchasing property acquired by the
institution through foreclosure. The Board's response to this comment
is addressed in detail later in the preamble.
Section-by-Section Analysis of Comments Received
The following narrative summarizes the comments received on the
various sections of the regulations during the comment period, in
response to the Regulatory Burden Notice, and as a followup to the
Dallas meeting, and provides the Board's response to those comments.
Section 612.2130--Definitions
While no comments were received regarding the proposed changes to
this section, the FCC provided comments on the definitions in the
existing regulations for ``controlled entity'' and ``officer'' and
requested the FCA to define the terms ``financially obligated'' and
``business proprietor'' to clarify how the prohibitions in proposed
Secs. 612.2140(g) and 612.2150(h) are intended to interface.
The FCC recommended changing the definition of ``controlled
entity'' to one similar to that used in the attribution rules of the
lending limit regulations. See 12 CFR 614.4358(a)(3). Specifically,
this would increase the 5-percent threshold for control in existing
regulations to a 50-percent threshold. The FCC believes that 5-percent
ownership is a very stringent and perhaps unrealistic test of control,
and that the term ``controlling influence,'' without a higher threshold
is perhaps too vague to be meaningful.
The Board does not believe that the definition of control in the
lending limit regulations is an appropriate definition for standards-
of-conduct regulations. The purpose of the definition of control in the
lending limit regulations is to identify when borrowers are so related
that they should be regarded as a single credit risk. The purpose of
the definition of control in the standards-of- conduct regulations is
to identify when an interest is so significant that if an individual
were to act on a matter concerning the related party, there would be an
appearance of a conflict of interest. Consequently, the FCA believes
that the control threshold for standards of conduct should be much
lower than the control threshold for the purposes of lending limits.
Control thresholds used in regulations directed at conflicts of
interest are typically much lower. For example, the Securities and
Exchange Commission requires disclosure of certain transactions with
the institution of individuals owning 5 percent or more of a class of
the institution's stock. The Comptroller of the Currency, the Federal
Deposit Insurance Corporation, and the Office of Thrift Supervision
have similar requirements for institutions they regulate that are
public companies required to register under the Securities Exchange Act
of 1934. The Comptroller imposes similar disclosure requirements on all
national banks when they sell their securities, whether or not they are
public companies. The phrase ``exercises a controlling influence'' is
intended as a catch-all to capture those situations in which a person
does not meet the objective control tests, but for some other reason
has the power to control the management of the entity's policies. This
term is a common component of control definitions and has long been a
component of the part 612 definition of control without causing a
particular problem. The definition is used to determine when a director
or officer must recuse him or herself and in the reporting provisions,
both of which are direct responsibilities of directors and employees.
Such persons are likely to know when they are in a position to control
management of the entity's policies, and, if in doubt, should err on
the side of recusal and reporting. For the reasons stated above, no
change has been made to the definition of ``controlled entity.''
The FCC suggested that the position of chief executive officer be
added to the definition of ``officer'' since a number of System
institutions have both a president and a chief executive officer, or a
chief executive officer rather than a president. The Board adopts this
suggestion and also adds specific references to chief operating
officers, chief financial officers, and chief credit officers.
On a related issue, the FCC questioned whether an association's
contracting with its supervising bank for a Standards of Conduct
Officer would violate the joint employee provisions of Sec. 612.2157.
To clarify that it would not, unless the person otherwise satisfies the
definition in Sec. 612.2130(m), the term ``Standards of Conduct
Officer'' is changed to the ``Standards of Conduct Official'' in the
final regulations.
The FCC recommended that the term ``financially obligated'' be
defined, and that prohibited ``financially obligated'' transactions be
more clearly distinguished from business relationships that are
permissible.
The final regulations define ``financially obligated with'' to mean
having a joint legally enforceable obligation with, being financially
obligated on behalf of (contingently or otherwise), having an
enforceable legal obligation secured by a property owned by another, or
owning property that secures an enforceable legal obligation of
another. The Board's revision to Secs. 612.2140(g) and 612.2150(h)
responds to the request to distinguish permissible business
relationships from prohibited ``financially obligated with''
relationships and is discussed below under those sections.
As a result of this revision, the term ``business proprietor'' is
no longer used in the regulations and its definition has been deleted.
In addition, to avoid any possible confusion relative to reporting
requirements, the definition for the term ``business relationship'' or
``transacts business'' has been deleted in the final rule.
The definition of ``ordinary course of business'' in the final
regulations has been added as described in the discussion of
Sec. 612.2140.
The definition of ``family'' has been clarified to spell out more
specifically those persons included under the phrase ``and each person
having such relationships by marriage.''
Section 612.2135--Director and Employee Responsibilities and Conduct--
Generally
No comments were received on this section and it is adopted as
proposed.
Section 612.2140--Directors--Prohibited Conduct
The Board proposed to adopt some of the specific prohibitions
applicable to employees and specifically requested comments on whether
these prohibitions would operate too restrictively on directors. A
number of comments were received. The majority of commenters opposed
the proposed prohibition in paragraph (f) of this section concerning a
director's purchasing property owned by the director's institution or
an institution it supervises or is supervised by during the preceding
12 months when such property was acquired through foreclosure or
similar action. The FCC asserted that a strict prohibition would make
it more difficult to attract or retain qualified directors and
suggested that such purchases be permitted on an institution-by-
institution basis depending on whether the institution has adequate
controls in place to ensure that directors do not receive an advantage
or favoritism over other prospective purchasers. Other commenters
suggested that there are less restrictive alternatives available to
avoid real or apparent conflicts of interest and ensure continued
public confidence in the System. One alternative offered was a general
prohibition on acquired property purchases by directors except by
public auction or open competitive bidding. The commenters also
disagreed that the potential for conflicts of interest is as great for
directors as it is for employees.
After additional consideration of the issues in light of the public
comments, the Board has concluded that a total prohibition of director
purchases of acquired property may be overly restrictive. Directors of
Farm Credit Banks, associations, and certain directors of agricultural
credit banks, except outside directors, are required to be farmers,
ranchers, or producers or harvesters of aquatic products, and as such
may want to acquire additional land that becomes available in their
communities. Restrictions on their ability to acquire land that becomes
available for sale from the institution while they are serving as
director could be a serious disincentive for a successful individual to
serve as a director. On the other hand, the potential for conflict is
especially serious where there is strong motivation for acquiring
property owned by the institution. Therefore, it is important that
there be adequate controls in place to ensure that the director's
impartiality is not impaired and that the director does not use his or
her position to gain some advantage in acquiring property. The final
regulations do not prohibit such acquisitions, but require that the
property be purchased at public auctions or in open competitive
bidding. In addition, to avoid the appearance of conflict, it is
important that a director interested in acquiring such property not
participate in deliberations or decisions concerning foreclosure or
disposition of that property. Therefore, the final regulations prohibit
a director from acquiring such property, even through public auction or
competitive bidding, if he or she has participated in the decision to
foreclose or dispose of the property or in establishing the terms of
the sale.
The FCC recommended that there be an additional exception in
paragraph (g) of this section under which an otherwise prohibited
transaction would be permissible if approved by the Standards of
Conduct Official. Paragraph (g) of the proposed regulations prohibited
lending transactions between directors and other directors, employees
or borrowers, but excepts loans between family members, loans made in
an official capacity, and transactions in the ordinary course of
business, as defined. The commenter recommended that the suggested
approval be based upon a determination that the transaction does not
present any significant risk of impairing the director's (or
employee's) ability to perform his or her duties with impartiality and
in compliance with regulations.
After considering the comment and the likelihood that the
institutions themselves are in the best position to know what is in the
ordinary course of business in the local business environment, the
Board concluded that the suggestion had merit as a substitution for the
ordinary course of business exception. However, the Board believes that
there should be a regulatory standard against which such determinations
can be evaluated that will provide a measure of uniformity among FCS
institutions. The Board concluded that some relief from the prohibition
is appropriate when the transaction is so insignificant in amount as
not to create the appearance of a conflict in the eyes of a reasonable
person or is an ordinary course of business transaction that is not on
preferential terms.
Therefore, in the final regulations the proposed ordinary course of
business exception has been replaced by a provision that essentially
allows the Standards of Conduct Officer to grant a waiver where: (1)
The amount of the transaction is so immaterial that it would not cause
a reasonable person with knowledge of the relevant facts to question
the impartiality or objectivity of the director in performing his or
her official duties; or (2) where the transaction is in the ordinary
course of business; provided the director recuses him or herself from
any matter affecting the financial interest of the other party to the
transaction. ``Ordinary course of business'' is defined to mean a
transaction with a person who is in the business of offering the goods
or services that are the subject of the transaction on terms that are
not preferential or a transaction between two persons who are in
business together that is incident to the business they conduct
together. A ``preferential'' transaction is one that is not on the same
terms as those available for comparable transactions with other persons
who are not officers and directors of System institutions. The Standard
of Conduct Official's determination that either of the circumstances
warranting an exception exists must be documented and is subject to the
recordkeeping requirements, unless the transaction falls within any
materiality thresholds for various types of transactions or specific
ordinary course of business guidelines established by the Board's
standards-of-conduct policy. While not applicable, the Uniform
Standards of Ethical Conduct for Executive Branch Employees may be
useful as a resource in determining such policy guidelines.
The Board believes that this change responds to the FCC's concern
that a deferral of payment may be construed as a loan and the concern
that the exclusion in the proposed regulation may fail to reach
transactions between an elected director (or employee) who is a
borrower and an institution's outside director.
The FCC recommended that the FCA explain its rationale for
prohibiting employees from being financially obligated with directors,
other employees, and borrowers, but having no similar prohibition for
directors.
The FCA believes there is a greater potential for conflict for
employees in having these types of relationships with borrowers because
employees are in a position to have a more direct influence on the
institution's dealings with the borrower. Also, since directors (except
outside directors) are statutorily required to be borrower/
stockholders, such a restriction could constitute an inappropriate
restraint on the ability of directors to pursue their primary
occupation. However, in light of the greater flexibility granted in the
final regulation to define an exception to the prohibition on lending
transactions, the Board believes that the institution can make
appropriate distinctions in its policies to reflect the greater
potential for conflict among employees and the impact of the
prohibition on the ability of the director to pursue his or her primary
occupation. Therefore, the final regulations make the prohibition for
directors congruent with the employee prohibition by including
``financially obligated with'' transactions within the scope of the
prohibition. See Sec. 612.2150 for discussion of the comments on this
prohibition for employees. In addition, the final regulation expands
the family loan transaction exception to include any person residing in
the director's household and relies on recusal to prevent conflicts of
interest. Accordingly, the recusal provision in Sec. 612.2140(a) is
expanded to include any person residing in the director's household and
to include a specific reference to business partners.
Section 612.2145--Director Reporting
The FCC believes the requirement to disclose the name of any
relative or entity controlled by a relative that transacts business
with the institution or an institution supervised by the institution is
overly broad. The FCC suggested that the definition of ``relative,''
for purposes of disclosure under Secs. 612.2145(b)(1) and
612.2155(b)(1), be limited to immediate family members as defined in
part 620 of this chapter. Section 620.1(e) of this chapter defines
``immediate family member'' to mean spouse, parents, siblings,
children, mothers- and fathers-in-law, brothers- and sisters-in-law,
and sons- and daughters-in-law. In addition, the FCC commented that it
is extremely difficult for a director to disclose a list of borrowers
with whom the director or the director's entity transacts business,
since if the director is not involved in the day-to-day operations of
the business, he or she will have little or no knowledge of the people
who conduct business with the director's entity. Also, a director may
not know that the individual or entity is a borrower. The FCC assumed
that this was not the intention of Sec. 612.2145 and that the
requirement to disclose ``to the best of his or her knowledge after
reasonable inquiry'' was designed to address this problem. However, the
FCC recommended that the requirement of ``reasonable inquiry'' be
deleted, noting that it is difficult to know what reasonable inquiry is
in any particular case. The FCC also suggested that directors be
required to disclose only those business relationships with borrowers
that are other than ordinary course of business relationships,
unusually large transactions, ongoing contractual relationships, or
transactions with nonstandard terms and conditions, or terms other than
those arrived at through arm's-length negotiations. The FCC argued that
any appearance of conflict would be eliminated by the knowledge that
neither the director nor the borrower received special terms. The FCC
also recommended that each institution be allowed the opportunity to
define transactions other than in the ordinary course of business
within the above parameters. The FCC also commented that it is
difficult to understand how a director's position can be compromised by
the mere fact that a borrower does business with the director or an
entity owned by the director.
Some of the FCC's comments appear to reflect a misunderstanding of
the requirements of both proposed and existing regulations. Neither the
proposed regulations nor existing regulations require the reporting of
transactions with borrowers. The proposed regulations merely require
the disclosure of the name of any relative or any entity in which the
director has a financial interest if the relative or entity transacts
business with borrowers. Transacting business with borrowers is the
standard that narrows the class of persons or entities a director must
report. An institution could, for instance, require instead the
reporting of the names of all entities in which a director or employee
has a financial interest, irrespective of whether such entities
transact business with borrowers. Such a requirement would require more
reporting, but might be easier for the individuals required to report.
The regulatory requirement is a minimum requirement. The FCA encourages
boards to require sufficient reporting to permit adequate monitoring of
potential conflicts.
After considering the comments on the reporting requirements, the
final regulations have been modified in several ways in response to
revisions to the prohibited conduct sections and in an effort to ease
any unnecessary burden the proposed regulations might have entailed.
The final regulations permit the institution greater flexibility to
determine the applicability of the prohibition on lending transactions
among directors, employees, and borrowers and relies more heavily on
recusal as a means of resolving conflicts of interest than the existing
regulations or the proposed regulations. Since the FCA believes that
the reporting requirements should provide the institution sufficient
information for the institution to determine when recusal rather than
prohibition is appropriate, an effort has been made to make the
reporting requirements parallel the recusal provisions.
The final regulations do not narrow the definition of ``relative''
as suggested. To do so would narrow the scope of the exception from the
lending and borrowing prohibition and the reach of the recusal
provision. The suggested narrowing would have deleted ``aunts, uncles,
nephews, nieces, and grandchildren,'' and these relationships are often
close enough that it would be unreasonable to restrict borrowing and
lending between family members when such family members are borrowers.
Similarly, these relationships are often close enough that it is not
unreasonable to require recusal from matters affecting their interests.
However, the standard for reporting the names of relatives in the final
regulations is whether the individual ``knows or has reason to know''
that a relative or entity transacts business with the institution or a
supervised institution or a borrower of such institutions. The ``knows
or has reason to know'' standard is adopted to address concerns that
``to the best of his or her knowledge after reasonable inquiry''
imposes a duty to inquire, the reasonableness of which could lead to
disputes. The ``knows or has reason to know'' standard is a common
legal standard that is used to ensure that a person's assertion about
the state of his or her knowledge can be challenged in circumstances in
which any reasonable person would be deemed to have knowledge. The
``actual knowledge'' standard suggested by the FCC is not adopted
because it does not allow any basis for the FCA to question a
director's assertion regarding his or her subjective state of mind even
in the most obvious circumstances.
The reporting requirements supporting the disclosure requirements
of part 620 of this chapter have been more narrowly focused in the
final regulations on information needed by the institution to make
appropriate disclosures under part 620 of this chapter, and more
clearly specify the information required to be reported. In addition,
the final regulations also permit greater flexibility in determining
the frequency of reporting for matters required to be reported, other
than matters that are required to be reported for part 620 of this
chapter.
The FCC also recommended that the reporting requirement for a
director or employee who becomes or plans to become involved in any
relationship, transaction, or activity that is required to be reported
or could constitute a conflict of interest be expanded to require the
Standards of Conduct Official to determine whether such involvement is,
in fact, a conflict of interest. The Board has adopted the FCC's
suggestion in the final regulations and has also added a requirement
that the determination specify what controls, such as recusal, are
necessary to ensure that the appearance of conflict is minimized.
A commenter noted that the proposed requirement that all new
directors report all matters listed in the director reporting section
within 1 month after election or appointment perpetuates the present
reporting redundancy involving a director candidate's disclosure. In
response to this concern, the final regulations require reporting only
if no disclosure was made as a director candidate under part 620 of
this chapter within the preceding 180 days, as this would be considered
sufficient disclosure.
Section 612.2150--Employees--Prohibited Conduct
Comments were received from the FCC regarding the prohibition
against employees borrowing from, lending to, or becoming financially
obligated with or on behalf of a director, employee, or agent of the
employing, supervising, or a supervised institution or a borrower or
loan applicant of the employing institution. The FCA also considered
the appropriateness of the FCC's comments on the parallel director
prohibition for the employee prohibition. The FCC recommended that
there be an additional exception under which an otherwise prohibited
transaction would be permissible if approved by the Standards of
Conduct Official after a determination that the transaction does not
present any significant risk of impairing the director's or employee's
ability to perform his or her duties with impartiality and in
compliance with the regulations.
The FCA concluded that the same modification that was made to
Sec. 612.2140(g) should be made to the employee prohibition. See
discussion above.
Both banks that commented objected to the relaxation of the
prohibition in Sec. 612.2150(j) against employees acting as real estate
agents or brokers because of a strong potential for creating conflicts
of interest, especially for staff appraisers. In addition, one
commenter observed that such a relaxation would be inconsistent with
the functional independence required by FCA appraisal regulations.
Another commenter asserted that the phrase ``for the employee's own
account'' is unclear and suggested substituting ``intended for the
employee's own or immediate family use.''
In view of the commenters' concerns and assurance that the
prohibition is not a particularly burdensome requirement for staff
appraisers, the FCA has decided not to adopt the appraiser exception at
this time. In addition, the final regulations substitute ``intended for
the use of the employee, a member of the employee's family, or a person
residing in the employee's household'' for ``for the employee's own
account,'' to clarify that the latter term was not intended to permit
an employee to act as an agent or broker for commercial purposes.
Section 612.2155--Employee Reporting
The FCC commented that the scope and frequency of reports required
by Sec. 612.2155 are unwarranted, unduly burdensome, and unduly costly
below the senior officer level. The FCC recommended that the FCA
distinguish between senior officers and other employees in the
reporting requirements. The FCC stated that, in its judgment, reports
by non-senior officers when hired and biennially thereafter are fully
adequate, especially since employees are required to report covered
activities as they occur in the interim. They also recommended that the
FCA remove the specific reporting requirements and require institutions
to establish reporting procedures to ensure that relationships and
activities subject to the regulations are properly disclosed and acted
upon.
The FCC commented on proposed paragraph (b)(1) of this section,
which requires employees to file an annual statement disclosing the
name of any relative or entity controlled by relatives that transact
business with the institution or any institution supervised by the
institution. The concern raised was that the disclosure is to be based
not only on actual knowledge, but also upon reasonable inquiry. This
was considered to be unreasonably broad in view of the definition of
``relative,'' because many such relatives may be virtual strangers to
the employee in question and it is difficult to know what reasonable
inquiry is in any particular case. The FCC also suggested that
``relative'' for purposes of disclosure be limited to immediate family
members, as defined in Sec. 620.1(e) of this chapter.
The same modifications that were made to the director reporting
sections have been made to the employee reporting sections in the final
regulations. Part 620 reporting requirements are focused on matters not
already within the institution's knowledge and specifically restricted
to employees who are subject to disclosure requirements, namely senior
officers, as defined in part 620 of this chapter. The final regulations
allow the institution to determine employee reporting frequency for
matters not required for part 620 disclosures, but the institution must
establish reporting requirements sufficient to permit the effective
enforcement of the regulations and the standards-of-conduct policy.
This will allow institutions to exclude certain individuals or classes
of individuals from the reporting requirement based on the functions
the employee performs. For instance, positions where there is a
substantial degree of supervision and a low level of responsibility may
make the reporting requirement unnecessary.
The FCC commented that it appears Sec. 612.2150(d) prohibits an
employee from serving as a director of an entity that transacts
business with the employing or supervised institution, while
Sec. 612.2155(b)(2) requires an employee to report the name and nature
of any entity in which the employee has a financial interest or on
whose board the employee sits, if the entity transacts business with
the employing institution. The final regulations delete the reference
to entities on whose board the employee serves in the reporting
requirement.
In response to an FCC recommendation on director reporting
requirements, Sec. 612.2155 is expanded to require the Standards of
Conduct Official to determine whether any reported transaction or
activity is, in fact, a conflict of interest and what controls are
necessary to ensure that there is no appearance of a conflict of
interest.
A commenter noted that for new employee reporting requirements it
is unclear whether 1 month refers to the time an employment offer is
extended and accepted or 1 month after the employee commences work. The
final regulations have been revised to make it clear that a newly hired
employee must report the required matters within 30 days after
accepting an offer for employment. However, under the final
regulations, the institution may establish a reasonable period for such
new employees to terminate such transactions, activities, or
relationships not to exceed the period provided for existing employees
to terminate conduct prohibited under the institution's policies.
The FCA believes that these changes, together with the greater
flexibility in defining exceptions to prohibited lending and borrowing
relationships, will enable institutions to fashion standards-of-conduct
programs that are more focused on areas in which the potential for
conflict is most significant without imposing ineffective, burdensome,
and costly reporting requirements.
Although enhancing the disclosure of financial information and
reporting of conflicts of interest was the purpose of section 514 of
the 1992 Act, the experience of the FCA in implementing Uniform
Standards of Ethical Conduct for Executive Branch Employees is that
training employees to recognize situations that present conflicts of
interest is also an effective use of resources to prevent conflicts of
interest. The FCA strongly encourages each System institution to
conduct effective periodic training programs to ensure that employees
are informed of the requirements of the regulations and the
institution's policies and are sensitive to circumstances that give the
appearance of a conflict of interest. Although the FCA believes that
the responsibility to avoid actual or apparent conflicts of interest
rests primarily with the individual director or employee, the
institution has a responsibility to develop policies and procedures
that monitor compliance with the regulation and avoid the appearance of
conflict. Providing guidance and training concerning appropriate and
inappropriate behavior is an effective way of achieving that end.
Section 612.2157--Joint Employees
The FCC questioned the advisability of having the supervising
bank's Standards of Conduct Officer contract with an association in the
district to comply with these requirements on behalf of the association
and be accountable to the association's board. The FCC stated that it
is not clear whether this arrangement is possible since the Standards
of Conduct Officer is an officer of the bank as defined in
Sec. 612.2130(m).
The Standards of Conduct Officer does not come within the
definition of ``officer'' in Sec. 612.2130(m), unless the individual
designated to perform the duties of the Standards of Conduct Officer
satisfies the definition because of other duties. Therefore, for
clarity, the position is referred to in the final regulations as the
``Standards of Conduct Official'' rather than ``Standard of Conduct
Officer,'' but in no way is this action intended to diminish the
importance of the position. In addition, the final regulations do not
require an association to contract with the bank's Standards of Conduct
Official. An association may contract with the bank for these services
to be performed by an individual whom the bank has designated as the
bank's Standards of Conduct Official. The final regulations also
include reference to an agricultural credit bank in addition to a Farm
Credit Bank to provide for the situation in which an association is
supervised by such a bank.
Section 612.2160--Institution Responsibilities
No comments were received on this new section and it is adopted as
proposed.
Section 612.2165--Policies and Procedures
The FCC suggested that the regulations require an institution to
provide a reasonable period of time for new directors and new employees
to terminate transactions, relationships, and activities that are
prohibited by the regulations and the institution's standards-of-
conduct policies. The Board agrees with this suggestion and adds a new
paragraph (b)(9) requiring a System institution to provide a reasonable
period of time for new directors and new employees to terminate
transactions, relationships, and activities that are prohibited. The
purpose of this revision is to clarify that a new director or employee
involved in a prohibited transaction prior to election or hiring is not
prohibited from accepting the position. However, such persons are
required to terminate any transactions subject to prohibitions within
such time period as established by institution policy, beginning with
the commencement of official duties, except that such period may not
exceed the period established for existing directors and employees to
terminate transactions, relationships, or activities prohibited by the
institution's policies.
Section 612.2170--Standards of Conduct Official
In addition to changing ``Officer'' to ``Official,'' as discussed
above, the final regulations add a requirement that records be
maintained for all determinations made by the Standards of Conduct
Official and for resolution of each case reported pursuant to this
part. Also, the office within the FCA designated to receive reports
under part 612 is changed to the Office of General Counsel, which also
receives reports relative to part 617 of this chapter.
Section 612.2180--Enforcement
No comments were received on the proposed amendments and these
actions are adopted as proposed.
Sections 612.2190 Through 612.2250
The sections regarding devotion of time to official duties,
political activity, nepotism, gifts or favors, and improper use of
official property are removed as proposed and the topics are required
to be addressed in the institution's policy established pursuant to
Sec. 612.2165. No comments were received regarding the removal of these
sections.
Section 612.2260--Standards of Conduct for Agents
No comments were received regarding this section and it is adopted
as proposed.
Section 612.2270--Prohibited Purchase of System Obligations
One commenter questioned the prohibition in existing regulations on
bank presidents' purchasing obligations of the Farm Credit banks and
the proposed extension of this prohibition to all employees who may
participate in any manner in funding activities of their institution.
The Board concurs that the potential for conflict in a director's or
employee's purchase of System obligations that are available for
purchase by the general public through members of the selling group or
in the secondary market is small. Therefore, the final regulations
permit such purchases under the conditions listed in Sec. 612.2270.
List of Subjects in 12 CFR Part 612
Agriculture, Banks, banking, Conflicts of interest, Rural areas.
For the reasons stated in the preamble, part 612 of chapter VI,
title 12 of the Code of Federal Regulations is revised to read as
follows:
PART 612--STANDARDS OF CONDUCT
Sec.
612.2130 Definitions.
612.2135 Director and employee responsibilities and conduct--
generally.
612.2140 Directors--prohibited conduct.
612.2145 Director reporting.
612.2150 Employees--prohibited conduct.
612.2155 Employee reporting.
612.2157 Joint employees.
612.2160 Institution responsibilities.
612.2165 Policies and procedures.
612.2170 Standards of Conduct Official.
612.2260 Standards of conduct for agents.
612.2270 Purchase of System obligations.
Authority: Secs. 5.9, 5.17, 5.19 of the Farm Credit Act (12
U.S.C. 2243, 2252, 2254).
Sec. 612.2130 Definitions.
For purposes of this part, the following terms are defined:
(a) Agent means any person, other than a director or employee, who
represents a System institution in contacts with third parties or who
provides professional services to a System institution, such as legal,
accounting, appraisal, and other similar services.
(b) A conflict of interest or the appearance thereof exists when a
person has a financial interest in a transaction, relationship, or
activity that actually affects or has the appearance of affecting the
person's ability to perform official duties and responsibilities in a
totally impartial manner and in the best interest of the employing
institution when viewed from the perspective of a reasonable person
with knowledge of the relevant facts.
(c) Controlled entity and entity controlled by mean an entity in
which the individual, directly or indirectly, or acting through or in
concert with one or more persons:
(1) Owns 5 percent or more of the equity;
(2) Owns, controls, or has the power to vote 5 percent or more of
any class of voting securities; or
(3) Has the power to exercise a controlling influence over the
management of policies of such entity.
(d) Director means a member of a board of directors.
(e) Employee means any salaried officer or part-time, full-time, or
temporary salaried employee.
(f) Entity means a corporation, company, association, firm, joint
venture, partnership (general or limited), society, joint stock
company, trust (business or otherwise), fund, or other organization or
institution, except System institutions.
(g) Family means an individual and spouse and anyone having the
following relationship to either: parents, spouse, son, daughter,
sibling, stepparent, stepson, stepdaughter, stepbrother, stepsister,
half brother, half sister, uncle, aunt, nephew, niece, grandparent,
grandson, granddaughter, and the spouses of the foregoing.
(h) Financial interest means an interest in an activity,
transaction, property, or relationship with a person or an entity that
involves receiving or providing something of monetary value or other
present or deferred compensation.
(i) Financially obligated with means having a joint legally
enforceable obligation with, being financially obligated on behalf of
(contingently or otherwise), having an enforceable legal obligation
secured by property owned by another, or owning property that secures
an enforceable legal obligation of another.
(j) Material, when applied to a financial interest or transaction
or series of transactions, means that the interest or transaction or
series of transactions is of such magnitude that a reasonable person
with knowledge of the relevant facts would question the ability of the
person who has the interest or is party to such transaction(s) to
perform his or her official duties objectively and impartially and in
the best interest of the institution and its statutory purpose.
(k) Mineral interest means any interest in minerals, oil, or gas,
including, but not limited to, any right derived directly or indirectly
from a mineral, oil, or gas lease, deed, or royalty conveyance.
(l) OFI means other financing institutions that have established an
access relationship with a Farm Credit Bank or an agricultural credit
bank under section 1.7(b)(1)(B) of the Act.
(m) Officer means the chief executive officer, president, chief
operating officer, vice president, secretary, treasurer, general
counsel, chief financial officer, and chief credit officer of each
System institution, and any person not so designated who holds a
similar position of authority.
(n) Ordinary course of business, when applied to a transaction,
means: (1) A transaction that is usual and customary between two
persons who are in business together; or
(2) A transaction with a person who is in the business of offering
the goods or services that are the subject of the transaction on terms
that are not preferential. Preferential means that the transaction is
not on the same terms as those prevailing at the same time for
comparable transactions for other persons who are not directors or
employees of a System institution.
(o) Person means individual or entity.
(p) Relative means any member of the family as defined in paragraph
(g) of this section.
(q) Service organization means each service organization authorized
by section 4.25 of the Act, and each unincorporated service
organization formed by one or more System institutions.
(r) Standards of Conduct Official means the official designated
under Sec. 612.2170 of these regulations.
(s) Supervised institution is a term which only applies within the
context of a System bank or an employee of a System bank and refers to
each association supervised by that bank.
(t) Supervising institution is a term that only applies within the
context of an association or an employee of an association and refers
to the bank that supervises that association.
(u) System institution and institution mean any bank, association,
or service organization in the Farm Credit System, including the Farm
Credit Banks, banks for cooperatives, agricultural credit banks,
Federal land bank associations, agricultural credit associations,
Federal land credit associations, production credit associations, the
Federal Farm Credit Banks Funding Corporation, and service
organizations.
Sec. 612.2135 Director and employee responsibilities and conduct--
generally.
(a) Directors and employees of all System institutions shall
maintain high standards of industry, honesty, integrity, impartiality,
and conduct in order to ensure the proper performance of System
business and continued public confidence in the System and each of its
institutions. The avoidance of misconduct and conflicts of interest is
indispensable to the maintenance of these standards.
(b) To achieve these high standards of conduct, directors and
employees shall observe, to the best of their abilities, the letter and
intent of all applicable local, state, and Federal laws and regulations
and policy statements, instructions, and procedures of the Farm Credit
Administration and System institutions and shall exercise diligence and
good judgment in carrying out their duties, obligations, and
responsibilities.
Sec. 612.2140 Directors--prohibited conduct.
A director of a System institution shall not:
(a) Participate, directly or indirectly, in deliberations on, or
the determination of, any matter affecting, directly or indirectly, the
financial interest of the director, any relative of the director, any
person residing in the director's household, any business partner of
the director, or any entity controlled by the director or such persons
(alone or in concert), except those matters of general applicability
that affect all shareholders/borrowers in a nondiscriminatory way,
e.g., a determination of interest rates.
(b) Divulge or make use of, except in the performance of official
duties, any fact, information, or document not generally available to
the public that is acquired by virtue of serving on the board of a
System institution.
(c) Use the director's position to obtain or attempt to obtain
special advantage or favoritism for the director, any relative of the
director, any person residing in the director's household, any business
partner of the director, any entity controlled by the director or such
persons (alone or in concert), any other System institution, or any
person transacting business with the institution, including borrowers
and loan applicants.
(d) Use the director's position or information acquired in
connection with the director's position to solicit or obtain, directly
or indirectly, any gift, fee, or other present or deferred compensation
or for any other personal benefit on behalf of the director, any
relative of the director, any person residing in the director's
household, any business partner of the director, any entity controlled
by the director or such persons (alone or in concert), any other System
institution, or any person transacting business with the institution,
including borrowers and loan applicants.
(e) Accept, directly or indirectly, any gift, fee, or other present
or deferred compensation that is offered or could reasonably be viewed
as being offered to influence official action or to obtain information
that the director has access to by reason of serving on the board of a
System institution.
(f) Knowingly acquire, directly or indirectly, except by
inheritance or through public auction or open competitive bidding
available to the general public, any interest in any real or personal
property, including mineral interests, that was owned by the employing,
supervising, or any supervised institution within the preceding 12
months and that had been acquired by any such institution as a result
of foreclosure or similar action; provided, however, a director shall
not acquire any such interest in real or personal property if he or she
participated in the deliberations or decision to foreclose or to
dispose of the property or in establishing the terms of the sale.
(g) Directly or indirectly borrow from, lend to, or become
financially obligated with or on behalf of a director, employee, or
agent of the employing, supervising, or a supervised institution or a
borrower or loan applicant of the employing institution, unless:
(1) The transaction is with a relative or any person residing in
the director's household;
(2) The transaction is undertaken in an official capacity in
connection with the institution's discounting, lending, or
participation relationships with OFIs and other lenders; or
(3) The Standards of Conduct Official determines, pursuant to
policies and procedures adopted by the board, that the potential for
conflict is insignificant because the transaction is in the ordinary
course of business or is not material in amount and the director does
not participate in the determination of any matter affecting the
financial interests of the other party to the transaction except those
matters affecting all shareholders/borrowers in a nondiscriminatory
way.
(h) Violate an institution's policies and procedures governing
standards of conduct.
Sec. 612.2145 Director reporting.
(a) Annually, as of the institution's fiscal year end, and at such
other times as may be required to comply with paragraph (c) of this
section, each director shall file a written and signed statement with
the Standards of Conduct Official that fully discloses:
(1) The names of any immediate family members as defined in
Sec. 620.1(e) of this chapter, or affiliated organizations, as defined
in Sec. 620.1(a) of this chapter, who had transactions with the
institution at any time during the year;
(2) Any matter required to be disclosed by Sec. 620.5(k) of this
chapter; and
(3) Any additional information the institution may require to make
the disclosures required by part 620 of this chapter.
(b) Each director shall, at such intervals as the institution's
board shall determine is necessary to effectively enforce this
regulation and the institution's standards-of-conduct policy adopted
pursuant to Sec. 612.2165, file a written and signed statement with the
Standards of Conduct Official that contains those disclosures required
by the regulations and such policy. At a minimum, these requirements
shall include:
(1) The name of any relative or any person residing in the
director's household, business partner, or any entity controlled by the
director or such persons (alone or in concert) if the director knows or
has reason to know that such individual or entity transacts business
with the institution or any institution supervised by the director's
institution; and
(2) The name and the nature of the business of any entity in which
the director has a material financial interest or on whose board the
director sits if the director knows or has reason to know that such
entity transacts business with: (i) The director's institution or any
institution supervised by the director's institution; or
(ii) A borrower of the director's institution or any institution
supervised by the director's institution.
(c) Any director who becomes or plans to become involved in any
relationship, transaction, or activity that is required to be reported
under this section or could constitute a conflict of interest shall
promptly report such involvement in writing to the Standards of Conduct
Official for a determination of whether the relationship, transaction,
or activity is, in fact, a conflict of interest.
(d) Unless a disclosure as a director candidate under part 620 of
this chapter has been made within the preceding 180 days, a newly
elected or appointed director shall report matters required to be
reported in paragraphs (a), (b), and (c) of this section to the
Standards of Conduct Official within 30 days after the election or
appointment and thereafter shall comply with the requirements of this
section.
Sec. 612.2150 Employees--prohibited conduct.
An employee of a System institution shall not:
(a) Participate, directly or indirectly, in deliberations on, or
the determination of, any matter affecting, directly or indirectly, the
financial interest of the employee, any relative of the employee, any
person residing in the employee's household, any business partner of
the employee, or any entity controlled by the employee or such persons
(alone or in concert), except those matters of general applicability
that affect all shareholders/borrowers in a nondiscriminating way, e.g.
a determination of interest rates.
(b) Divulge or make use of, except in the performance of official
duties, any fact, information, or document not generally available to
the public that is acquired by virtue of employment with a System
institution.
(c) Use the employee's position to obtain or attempt to obtain
special advantage or favoritism for the employee, any relative of the
employee, any person residing in the employee's household, any business
partner of the employee, any entity controlled by the employee or such
persons (alone or in concert), any other System institution, or any
person transacting business with the institution, including borrowers
and loan applicants.
(d) Serve as an officer or director of an entity that transacts
business with a System institution in the district or of any commercial
bank, savings and loan, or other non-System financial institution,
except employee credit unions. For the purposes of this paragraph,
``transacts business'' does not include loans by a System institution
to a family-owned entity, service on the board of directors of the
Federal Agricultural Mortgage Corporation, or transactions with
nonprofit entities or entities in which the System institution has an
ownership interest. With the prior approval of the board of the
employing institution, an employee of a Farm Credit Bank or association
may serve as a director of a cooperative that borrows from a bank for
cooperatives. Prior to approving an employee request, the board shall
determine whether the employee's proposed service as a director is
likely to cause the employee to violate any regulations in this part or
the institution's policies, e.g., the requirements relating to devotion
of time to official duties.
(e) Use the employee's position or information acquired in
connection with the employee's position to solicit or obtain any gift,
fee, or other present or deferred compensation or for any other
personal benefit for the employee, any relative of the employee, any
person residing in the employee's household, any business partner of
the employee, any entity controlled by the employee or such persons
(alone or in concert), any other System institution, or any person
transacting business with the institution, including borrowers and loan
applicants.
(f) Accept, directly or indirectly, any gift, fee, or other present
or deferred compensation that is offered or could reasonably be viewed
as being offered to influence official action or to obtain information
the employee has access to by reason of employment with a System
institution.
(g) Knowingly acquire, directly or indirectly, except by
inheritance, any interest in any real or personal property, including
mineral interests, that was owned by the employing, supervising, or any
supervised institution within the preceding 12 months and that had been
acquired by any such institution as a result of foreclosure or similar
action.
(h) Directly or indirectly borrow from, lend to, or become
financially obligated with or on behalf of a director, employee, or
agent of the employing, supervising, or a supervised institution or a
borrower or loan applicant of the employing institution, unless: (1)
The transaction is with a relative or any person residing in the
employee's household;
(2) The transaction is undertaken in an official capacity in
connection with the institution's discounting, lending, or
participation relationships with OFIs and other lenders; or
(3) The Standards of Conduct Official determines, pursuant to
policies and procedures adopted by the board, that the potential for
conflict is insignificant because the transaction is in the ordinary
course of business or is not material in amount and the employee does
not participate in the determination of any matter affecting the
financial interests of the other party to the transaction except those
matters affecting all shareholders/borrowers in a nondiscriminatory
way.
(i) Violate an institution's policies and procedures governing
standards of conduct.
(j) Act as a real estate agent or broker; provided that this
paragraph shall not apply to transactions involving the purchase or
sale of real estate intended for the use of the employee, a member of
the employee's family, or a person residing in the employee's
household.
(k) Act as an agent or broker in connection with the sale and
placement of insurance; provided that this paragraph shall not apply to
the sale or placement of insurance authorized by section 4.29 of the
Act.
Sec. 612.2155 Employee reporting.
(a) Annually, as of the institution's fiscal yearend, and at such
other times as may be required to comply with paragraph (c) of this
section, each senior officer, as defined in Sec. 620.1(o) of this
chapter, shall file a written and signed statement with the Standards
of Conduct Official that fully discloses:
(1) The names of any immediate family members, as defined in
Sec. 620.1(e) of this chapter, or affiliated organizations, as defined
in Sec. 620.1(a) of this chapter, who had transactions with the
institution at any time during the year;
(2) Any matter required to be disclosed by Sec. 620.5(k) of this
chapter; and
(3) Any additional information the institution may require to make
the disclosures required by part 620 of this chapter.
(b) Each employee shall, at such intervals as the Board shall
determine necessary to effectively enforce this regulation and the
institution's standards-of-conduct policy adopted pursuant to
Sec. 612.2165, file a written and signed statement with the Standards
of Conduct Official that contains those disclosures required by the
regulation and such policy. At a minimum, these requirements shall
include: (1) The name of any relative or any person residing in the
employee's household, any business partner, or any entity controlled by
the employee or such persons (alone or in concert) if the employee
knows or has reason to know that such individual or entity transacts
business with the employing institution or any institution supervised
by the employing institution; and
(2) The name and the nature of the business of any entity in which
the employee has a material financial interest or on whose board the
employee sits if the employee knows or has reason to know that such
entity transacts business with: (i) The employing institution or any
institution supervised by the employing institution; or
(ii) A borrower of the employing institution or any institution
supervised by the employing institution.
(c) Any employee who becomes or plans to become involved in any
relationship, transaction, or activity that is required to be reported
under this section or could constitute a conflict of interest shall
promptly report such involvement in writing to the Standards of Conduct
Official for a determination of whether the relationship, transaction,
or activity is, in fact, a conflict of interest.
(d) A newly hired employee shall report matters required to be
reported in paragraphs (a), (b), and (c) of this section to the
Standards of Conduct Official within 30 days after accepting an offer
for employment and thereafter shall comply with the requirements of
this section.
Sec. 612.2157 Joint employees.
No officer of a Farm Credit Bank or an agricultural credit bank may
serve as an employee of an association in its district and no employee
of a Farm Credit Bank or an agricultural credit bank may serve as an
officer of an association in its district. Farm Credit Bank or
agricultural credit bank employees other than officers may serve as
employees other than officers of an association in its district
provided each institution appropriately reflects the expense of such
employees in its financial statements.
Sec. 612.2160 Institution responsibilities.
Each institution shall: (a) Ensure compliance with this part by its
directors and employees and act promptly to preserve the integrity of
and public confidence in the institution in any matter involving a
conflict of interest, whether or not specifically addressed by this
part or the policies and procedures adopted pursuant to Sec. 612.2165;
(b) Take appropriate measures to ensure that all directors and
employees are informed of the requirements of this regulation and
policies and procedures adopted pursuant to Sec. 612.2165;
(c) Adopt and implement policies and procedures that will preserve
the integrity of and public confidence in the institution and the
System pursuant to Sec. 612.2165;
(d) Designate a Standards of Conduct Official pursuant to
Sec. 612.2170; and
(e) Maintain all standards-of-conduct policies and procedures,
reports, investigations, determinations, and evidence of compliance
with this part for a minimum of 6 years.
Sec. 612.2165 Policies and procedures.
(a) Each institution's board of directors shall issue, consistent
with this part, policies and procedures governing standards of conduct
for directors and employees.
(b) Board policies and procedures issued pursuant to paragraph (a)
of this section shall reflect due consideration of the potential
adverse impact of any activities permitted under the policies and shall
at a minimum: (1) Establish such requirements and prohibitions as are
necessary to promote public confidence in the institution and the
System, preserve the integrity and independence of the supervisory
process, and prevent the improper use of official property, position,
or information. In developing such requirements and prohibitions, the
institution shall address such issues as the hiring of relatives,
political activity, devotion of time to duty, the exchange of gifts and
favors among directors and employees of the employing, supervising, and
supervised institution, and the circumstances under which gifts may be
accepted by directors and employees from outside sources, in light of
the foregoing objectives;
(2) Outline authorities and responsibilities of the Standards of
Conduct Official;
(3) Establish criteria for business relationships and transactions
not specifically prohibited by this part between employees or directors
and borrowers, loan applicants, directors, or employees of the
employing, supervised, or supervising institutions, or persons
transacting business with such institutions, including OFIs or other
lenders having an access or participation relationship;
(4) Establish criteria under which employees may accept outside
employment or compensation;
(5) Establish conditions under which employees may receive loans
from System institutions;
(6) Establish conditions under which employees may acquire an
interest in real or personal property that was mortgaged to a System
institution at any time within the preceding 12 months;
(7) Establish conditions under which employees may purchase any
real or personal property of a System institution acquired by such
institution for its operations;
(8) Provide for a reasonable period of time for directors and
employees to terminate transactions, relationships, or activities that
are subject to prohibitions that arise at the time of adoption or
amendment of the policies.
(9) Require new directors and new employees involved at the time of
election or hiring in transactions, relationships, and activities
prohibited by these regulations or internal policies to terminate such
transactions within the same time period established for existing
directors or employees pursuant to paragraph (b)(8) of this section,
beginning with the commencement of official duties, or such shorter
time period as the institution may establish.
(10) Establish procedures providing for a director's or employee's
recusal from official action on any matter in which he or she is
prohibited from participating under these regulations or the
institution's policies.
(11) Establish documentation requirements demonstrating compliance
with standards-of-conduct decisions and board policy;
(12) Establish reporting requirements, consistent with this part,
to enable the institution to comply with Sec. 620.5 of this chapter,
monitor conflicts of interest, and monitor recusal compliance; and
(13) Establish appeal procedures available to any employee to whom
any required approval has been denied.
Sec. 612.2170 Standards of Conduct Official.
(a) Each institution's board shall designate a Standards of Conduct
Official who shall: (1) Advise directors, director candidates, and
employees concerning the provisions of this part;
(2) Receive reports required by this part;
(3) Make such determinations as are required by this part;
(4) Maintain records of actions taken to resolve and/or make
determinations upon each case reported relative to provisions of this
part;
(5) Make appropriate investigations, as directed by the
institution's board; and
(6) Report promptly, pursuant to part 617 of this chapter, to the
institution's board and the Office of General Counsel, Farm Credit
Administration, all cases where: (i) A preliminary investigation
indicates that a Federal criminal statute may have been violated;
(ii) An investigation results in the removal of a director or
discharge of an employee; or
(iii) A violation may have an adverse impact on continued public
confidence in the System or any of its institutions.
(b) The Standards of Conduct Official shall investigate or cause to
be investigated all cases involving: (1) Possible violations of
criminal statutes;
(2) Possible violations of Secs. 612.2140 and 612.2150, and
applicable policies and procedures approved under Sec. 612.2165;
(3) Complaints received against the directors and employees of such
institution; and
(4) Possible violations of other provisions of this part or when
the activities or suspected activities are of a sensitive nature and
could affect continued public confidence in the Farm Credit System.
(c) An association board may comply with this section by
contracting with the Farm Credit Bank or agricultural credit bank in
its district to provide a Standards of Conduct Official.
Sec. 612.2260 Standards of conduct for agents.
(a) Agents of System institutions shall maintain high standards of
honesty, integrity, and impartiality in order to ensure the proper
performance of System business and continued public confidence in the
System and all its institutions. The avoidance of misconduct and
conflicts of interest is indispensable to the maintenance of these
standards.
(b) System institutions shall utilize safe and sound business
practices in the engagement, utilization, and retention of agents.
These practices shall provide for the selection of qualified and
reputable agents. Employing System institutions shall be responsible
for the administration of relationships with their agents, and shall
take appropriate investigative and corrective action in the case of a
breach of fiduciary duties by the agent or failure of the agent to
carry out other agent duties as required by contract, FCA regulations,
or law.
(c) System institutions shall be responsible for exercising
corresponding special diligence and control, through good business
practices, to avoid or control situations that have inherent potential
for sensitivity, either real or perceived. These areas include the
employment of agents who are related to directors or employees of the
institutions; the solicitation and acceptance of gifts, contributions,
or special considerations by agents; and the use of System and borrower
information obtained in the course of the agent's association with
System institutions.
Sec. 612.2270 Purchase of System obligations.
(a) Employees and directors of System institutions, other than the
Federal Farm Credit Banks Funding Corporation, may only purchase joint,
consolidated, or Systemwide obligations that are:
(1) Part of an offering available to the general public; and
(2) Purchased through a dealer or dealer bank affiliated with a
member of the selling group designated by the Federal Farm Credit Banks
Funding Corporation or purchased in the secondary market.
(b) No director or employee of the Federal Farm Credit Banks
Funding Corporation may purchase or otherwise acquire, directly or
indirectly, except by inheritance, any joint, consolidated, or
Systemwide obligation.
Dated: May 5, 1994.
Nan P. Mitchem,
Acting Secretary, Farm Credit Administration Board.
[FR Doc. 94-11496 Filed 5-12-94; 8:45 am]
BILLING CODE 6705-01-P
