Title: FINAL RULE--Personnel Administration--12 CFR Part 612
Issue Date: 05/13/1994
Agency: FCA
Federal Register Cite: 59 FR 24889
___________________________________________________________________________
FARM CREDIT ADMINISTRATION

12 CFR Part 612

RIN 3052-AB47

Personnel Administration


ACTION: Final rule.

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 follow-up 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 commentor 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 commentor 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 commentor, 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 [*24890] 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 commentor 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 commentor 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 follow-up 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 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 612.2157. To clarify that it would not, unless the person otherwise satisfies the definition in 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 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 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." [*24891]

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 commentors 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 commentors 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 commentors 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 commentor 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 [*24892] 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 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 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 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 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 [*24893] 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 commentor 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 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 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 commentor observed that such a relaxation would be inconsistent with the functional independence required by FCA appraisal regulations. Another commentor 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 commentors' 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 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 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 612.2150(d) prohibits an employee from serving as a director of an entity that transacts business with the employing or supervised institution, while 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, 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 commentor 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 [*24894] 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 612.2130(m).

The Standards of Conduct Officer does not come within the definition of "officer" in 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 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 commentor 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 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). [*24895]

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 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.

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.

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 [*24896] 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.

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 620.1(e) of this chapter, or affiliated organizations, as defined in 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 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 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.

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 [*24897] 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.

612.2155 -- Employee 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 senior officer, as defined in 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 620.1(e) of this chapter, or affiliated organizations, as defined in 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 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 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.

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.

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 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 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 612.2165; [*24898]

(d) Designate a Standards of Conduct Official pursuant to 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.

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 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.

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 612.2140 and 612.2150, and applicable policies and procedures approved under 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.

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.

612.2270 -- Purchase of System obligations.

(a) Employees and directors of System institutions, other than the Federal Farm [*24899] 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